Societe Generale, the Paris-based global asset manager, has released research shedding light on the interaction between net flows of commodity-linked exchange-traded products and the prices of their underlying commodities.
Societe Generale’s research report shows ETP flows influencing prices in oil and precious metals markets.
Specifically, it notes that net flows of gold-tracking ETPs have historically been positively correlated with the underlying gold price, further amplifying the commodity’s price movement. On the contrary, net flows in oil-tracking ETPs have historically exhibited a negative correlation to crude oil prices. The model suggests this inverse relationship has allowed oil-tracking ETP flows to lend support to falling oil prices and has provided resistance when prices move upwards.
The report used statistical tests which indicated that a change in the price of the commodity exerted a strong effect on related ETP flows, while a change in ETP flows would drive a less significant effect on the commodity’s price. In other words, a change in the price of the commodity led to a relatively significant change in ETP flows which in turn led to a less significant change in the commodity price.
The model examined the relationship between changes in oil prices and ETP flows that occurred after the OPEC meeting held in November 2014. Interaction between these variables before this stage was reportedly less significant. During this period, it was found that a 20% ($9) decline from the mean price of oil ($45) resulted in increased flows into long-only ETPs of 114%. These flows resulted in oil prices rising almost 6% ($3), offsetting some of the initial decline.
Interestingly, the result was symmetrical – outflows to ETPs were recorded when prices were rising. The report concluded that ETP inflows (and outflows) were a moderating influence on price decreases (and increases).
The findings confirm a relationship exists between price changes in oil and net ETP flows, a finding that had previously been established in the precious metals sector. The ability of the two variables to influence each other was hypothesised to depend on a few key factors including participants’ propensity to trade in the ETP market, and the size of the ETP market relative to the total market for that commodity.
As the report notes: ‘Estimated assets under management (AUM), as of the end of September 2015, stood at $67bn across the entire long-only precious metal ETP sector. The precious metals sector is still, by far, the most significant commodity sector in terms of AUM. Flows out of gold ETPs have thus had an enormously bearish impact on the price of gold.’
Unlike oil ETP flows and price movements, flows relating to gold ETPs have been largely positive with the gold price (buying into price strength and selling during price weakness).
The report suggests that if ETP flows remain elevated and increase in popularity, their impact on prices could be significant and may warrant closer tracking to better understand movements in commodity pricing.