Metal Funds Rule Commodities in May as Traders Bet on Gains

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Investors are buying into industrial-metal funds at a faster pace than any other commodity, underscoring optimism about the health of the global economy.

U.S. exchange-traded products backed by the metals attracted $71.1 million in May, putting flows on track for the biggest monthly increase since 2012, according to data compiled by Bloomberg as of Wednesday. The extra funds represent a 22 percent increase in market value, more than other commodity groups such as agriculture and energy.

Money managers are betting that China’s efforts to kickstart its slowing economy, including three interest-rate cuts in six months, will succeed in increasing demand for raw materials. The country, the biggest consumer of industrial metals, is expected to lower rates this year by the most since the global financial crisis, a Bloomberg survey of economists showed last week.

“Some of the ETF flows have been driven by the fact that China in particular continues to expand its various quantitative easing and monetary policy stimulus programs,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management, said by phone from Birmingham, Alabama. “They’re the elephant in the room when it comes to commodity prices.”

Metals Slump

Investors added money into ETPs even as prices slumped this month. The strengthening dollar reduced the appeal of commodities as an alternative investment and China’s stimulus has been weaker than the Federal Reserve or European Central Bank so far. The London Metal Exchange Index of the six industrial metals is heading for the worst month since January after a 5.5 percent decline.

A Bloomberg survey of 12 copper traders and analysts this week showed the majority are bearish on prices. The metal on the LME climbed as much as 0.7 percent on Friday.

Broad-based commodity ETPs took in $270.3 million during the month, about 3.4 percent of the market value, data compiled by Bloomberg show. Energy and precious metals funds saw withdrawals.

Supply disruptions and shutdowns at mines around the world support the bullish case for metals, according to Patricia Mohr, an analyst at Bank of Nova Scotia in Toronto.

Tia Maria

Violent protests against Peru’s Tia Maria mine project in the past two months threaten the nation’s goal of becoming a significant copper producer. Zinc mines in Australia and Ireland are scheduled to close later this year, while Indonesia has banned nickel ore exports.

Recent U.S. economic reports suggest the economy is strengthening after growth in the first quarter was the slowest in a year. Sales of new homes climbed more than forecast and a measure of consumer confidence unexpectedly rose from a four-month low, data on Tuesday showed.

In China, the central bank will reduce the one-year lending rate by another 25 basis points to a 4.85 percent by year-end, bringing the cumulative cuts in 2015 to 75 basis points, according to the median estimate from a Bloomberg survey. The nation accounts for more than 40 percent of industrial-metals demand.

“The market is becoming more optimistic about the state of the global economic growth,” Daniela Corsini, a Milan-based analyst at Intesa Sanpaolo SpA, said by e-mail Wednesday. “We are bullish about the outlook for the main base metals over the next 12 months.”

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