Washington (Platts)--15Nov2011/644 am EST/1144 GMT

Precious metal exchange-traded product funds attracted the most financial inflows of all commodity exchange-traded fund products in the third quarter of 2011, ETF Securities said Monday in its Global Commodity ETP Quarterly report. ETF Securities provides a number of precious metals exchange-traded product funds, such as the ETFS Physical Gold fund.

During the third quarter, inflows to precious metal ETPs rose by $7.2 billion compared with the previous quarter, the largest quarterly increase since Q2 2010, when the European sovereign debt crisis first made the news.

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Flows were dominated by gold ETPs, which saw a total of $5.8 billion of investment inflows during the quarter. Silver ETPs saw net inflows of $1.6 billion during the third quarter.

Almost all the gold ETP inflows occurred in July, when the combination of a US budget ceiling stand-off, anticipation of a US sovereign debt downgrade, and deteriorating conditions in Europe drove gold ETP inflows up to $5.6 billion, the second largest monthly increase on record.

The previous largest increase occurred in May 2010, when Greece's debt problems changed investor perceptions about the long-term prospects for the euro, ETF analysts said.

Nearly 70% of the July inflows went into US-listed gold ETPs, "indicating that US investor concerns about the deteriorating US fiscal position and the loss of America's AAA sovereign debt rating were the main drivers of the surge in demand," ETF analysts said.

Silver ETPs also saw a sharp spike of inflows in July, with net inflows of $939 million, the largest monthly inflow since November 2010, suggesting that despite its widespread industrial usage, silver is still viewed by some investors as a safe-haven asset, according to ETF Securities analysts.

But the investment flows reversed in August and September in favor of European-listed gold ETPs, ETF analysts said. European investors increased their holdings by $1.3 billion in August and $500 million in September.

US investors were net sellers over the same period, selling the equivalent of $1 billion in August and $575 million, ETF analysts said.

"The switch in gold ETP demand likely reflects European investors' increase anxiety about rapidly rising sovereign risks in Italy and Spain, and the potential negative impact on the region's banks," the analysts said.

US investors appeared to be taking profits on gold positions as futures prices spiked to an all-time high of $1,910/oz, and as a source of liquidity to cover losses in other asset classes like equities, they added.

Eight of the top 10 commodity ETPs receiving the largest inflows during the third quarter were gold related, ETF Securities analysts said.

The top ETPs with the largest inflows were: SPDR Gold Trust, iShares COMEX Gold Trust, iShares Silver Trust, Source Physical Gold ETC, Sprott Physical Silver Trust, ZKB Gold ETF Hedged, ETFS Physical Gold, ZKB Gold ETF, db Physical Gold Euro Hedged ETC, and Julius Baer Physical Gold Fund.

Inflows to non-precious metal commodity ETPs have been "extremely weak" so far this year, falling by $5.6 billion in the year to September compared with a $2.5 billion increase over the year-ago period, analysts added.

Including precious metals, total commodity ETP inflows fell by a modest $5 million in the nine-month period compared with a $22.9 billion increase for the same period in 2010.

The main factors for the decline appear to be the general slowdown in economic growth, and investor re-allocations away from more cyclical risk assets towards cash and G-3 government bonds (bonds denominated in dollars, euros and yen), ETF Securities said.

--Nick Jonson, nick_jonson@platts.com

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