Why raw materials are losing the love

Industrial raw material prices initially held up pretty well after the meek Chinese growth data on Wednesday.

But according to Barclays, such resources - indeed the broader asset class - are losing the love.

The first quarter saw net inflows into commodity-based financial assets, such as exchange traded products, of $6.6bn, says the bank in a new note.

It was the strongest start to the year since 2012, boosted by oil market bargain hunters and a surge in gold buying based on "Grexit" fears and the Swiss National Bank's abandonment of its currency peg.

However, the full quarter figure masks a weak March, where $1.5bn of investments were liquidated, suggesting oil and gold bets were "one off factors . . . rather than any sea change in investor views toward commodities as a long-term asset class".

Funds that invest in commodity futures are retreating too.

"Investors in US gold, corn and US natural gas futures have heavily liquidated their holdings over the past month to the extent that the aggregate balance in the 17 largest US commodity futures is now neutral, having been consistently net long since late 2008," says Barclays.

An important cause of investor hesitance is fairly straightforward. Many commodities are in surplus at present, with markets in contango. This means prices are higher in the future and it costs funds to roll into the next contract.

"On average the roll yield was negative by about 1 per cent in Q1, its worst since Q2 2010," Barclays notes.

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