11.14.2011
By Markets Media

Commodities Get A Boost

As equities continue to show enhanced volatility and traders worry about Europe’s ability to recover from its current financial situation, some investors have begun shifting around portfolios to increase exposure to commodities.

The CBOE Volatility Index or VIX continues to remain above the key 30 point level at 31.5 whilst the S&P 500 fell 12 points to settle at 1251 on Monday – the proverbial “line in the sand” where key support lies. Should the 1251 level break, equities will continue to trend lower.

In turn, demand for hard assets has increased according to William Rhind, managing director at ETF Securities.

“Commodities and especially precious metals have been a beneficiary of this trend,” Rhind told Markets Media.

“The three main tailwinds for commodity investing right now are; the search for portfolio diversification/low correlated assets to equities and bonds, negative real interest rates and an escalating sovereign debt crisis particularly in Europe. ETF Securities has seen an increase in demand for ETFS Swiss Gold Trust: SGOL for example that stores its gold in physical form in Switzerland.”

It’s no surprise that Italy, Spain, Greece and Ireland’s woes has caused a flight to the U.S. Dollar as well as gold, but diversification remains key, especially for institutional investors with European debt exposure.

Increasingly, institutions are using exchange-traded notes and funds for commodity exposure rather than direct futures trading, which can require setting up an entire trading desk within a firm.

“ETPs have made commodity investing more accessible and institutions are increasingly choosing ETPs to access the commodity markets,” noted Rhind. “Heightened uncertainly caused by deteriorating sovereign conditions in Europe and weakening global growth have been major contributors to this year’s higher than usual commodity ETP flow volatility.”

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