Money pours into commodities

Investments in commodities are expanding at the quickest pace in six years on signs of rising economic growth, even as JPMorgan Chase & Co. and Goldman Sachs Group Inc. warn that some prices have rallied too fast.

The number of futures contracts on 24

commodities from oil to copper rose 9.3 per cent last month, the most since January 2006, according to data compiled by Bloomberg. Speculators are the most bullish since November, Commodity Futures Trading Commission data show. Gold and silver had the best start to a year since 1983, orange juice posted its biggest rally in more than three decades, the LMEX gauge of six industrial metals rose the most since 2006, and cattle futures advanced to a record.

Raw materials are rebounding from the first annual drop in three years on growing signs the world will skirt another recession and reports that manufacturing is expanding from China to India to the US Investors are betting record-low US interest rates and China?€™s efforts to shore up growth will bolster demand. The optimism is being tempered by Europe?€™s widening debt crisis, with the International Monetary Fund warning it could derail the global economy.

?€œThe economic news has been good, and people were underinvested, and that?€™s a recipe for markets to rise,?€ said Jess Gaspar, a managing director of Commonfund Asset Management in Wilton, Connecticut, which oversees $US25 billion of assets. ?€œIf the economy continues strong and central banks continue with monetary easing, then that would be very bullish for risky assets and for commodities in particular.?€

Commodity rebound

The Standard & Poor?€™s GSCI Total Return Index of 24 raw materials rose 2.2 per cent in January, rebounding from last year?€™s 1.2 per cent decline. Silver, zinc and nickel led the gains, while natural gas plunged 16 per cent and crude oil slipped 0.4 per cent. The MSCI All-Country World Index of equities rose 5.8 per cent including dividends, the best start in 18 years. Global bonds climbed 0.6 per cent and the US Dollar Index retreated 1.1 per cent, data compiled by Bloomberg show.

Federal Reserve policy makers pledged last month to keep borrowing costs near a record low at least until late 2014, and there is mounting speculation that China will ease curbs on lending to shore up growth. The Citigroup Economic Surprise Index for the US reached a 10-month high on Jan. 6, signaling data is beating analyst forecasts. US employment climbed more than forecast in January and the jobless rate unexpectedly fell to the lowest in three years, the Labor Department said today.

The S&P GSCI gauge rose for three consecutive days after the International Monetary Fund said Jan. 24 it now expects global growth of 3.3 per cent this year, compared with a September estimate of 4 per cent. The index also advanced the day after the World Bank reduced its forecast by the most in three years on Jan. 18, to 2.5 per cent from 3.6 per cent.

Demand ?€˜spark?€™

The divergence between those forecasts and price gains is spurring some analysts to warn the rally may end. This year?€™s surge in metals prices isn?€™t sustainable because the economy lacks the demand ?€œspark,?€ Michael J. Jansen, an analyst at JPMorgan in London, said in a report Jan. 30. The bank cut its 2012 price estimates for aluminum, nickel, silver and gold.

Goldman?€™s commodity research team, led by Jeffrey Currie in London, withdrew a recommendation to buy copper on Jan. 31 after a 16 per cent advance in about six weeks. While any decline may be ?€œlimited,?€ the rally was ?€œtoo much, too soon,?€ they wrote in a note. The bank forecast Jan. 13 that the S&P GSCI Enhanced Commodity Index would gain 15 per cent in 12 months, led by energy and metals. The gauge rose 1 per cent since then.

?€˜Rising on air?€™

Aluminum, zinc and lead are ?€œrising on air?€ and the gains in copper and tin are ?€œtoo far, too fast,?€ Macquarie Group Ltd. said in a report Jan. 30. The bank sees industrial output expanding 2.3 per cent this year, from 4.9 per cent in 2011.

?€œYou can?€™t really explain rationally why there isn?€™t more caution in the markets,?€ said Joel Naroff, president of Naroff Economic Advisors, a consultant in Holland, Pennsylvania. ?€œMarkets are probably a little more bullish than they should be given the risks out there.?€

The 17-nation euro region will probably contract 0.5 per cent this year as its debt crisis widens, according to the median of 18 economist estimates compiled by Bloomberg. Europe accounts for about 16 per cent of global oil demand and 18 per cent of copper consumption, data from the International Energy Agency and Barclays Capital show.

China slowing

China, the biggest user of everything from energy to copper to cotton, reported fourth-quarter growth of 8.9 per cent on Jan. 17, the slowest pace in 10 quarters. That increased speculation the People?€™s Bank of China would allow banks to set aside less of their deposits as reserves to stimulate lending. The bank did so for the first time since 2008 on Dec. 5.

Gasoline demand in the US, the world?€™s largest energy consumer, is the lowest in a decade because of increased fuel efficiency and slower economic growth. Stockpiles of motor fuel reached 230.1 million barrels in the week ended Jan. 27, the highest since February, the US Department of Energy said Feb. 1. Prices at the pump have tumbled 13 per cent since May 1 to $US3.455 a gallon, according to AAA, a motoring group.

Crude futures in New York, after rallying 25 per cent in the fourth quarter and reaching a seven-month high of $US103.74 a barrel on Jan. 4, were little changed in January. Oil rose 1.5 per cent to $US97.84 today, still about 18 per cent above the average over the past five years.

Copper, palladium shortages

While global growth may be slowing, the consumption of commodities is expanding faster than supply. Morgan Stanley predicts shortages in copper, palladium and iron ore this year and Barclays anticipates the same thing for tin. The London- based bank also expects oil inventories to drop in the third and fourth quarters as production falls short of demand. Rabobank International forecasts deficits in coffee and cocoa.

Depleting metal and energy deposits have spurred company takeovers as industrial growth stokes demand. Glencore International Plc, the world?€™s largest publicly traded commodities supplier, is in talks with Xstrata Plc to merge in a deal that would create an $US82 billion rival to BHP Billiton Ltd., the top miner. Global mining deals surged to $US98 billion last year, the highest since 2007, and energy takeovers totaled $US337 billion, just under the record $US340 billion in 2010.

The supply shortfalls may deepen should growth accelerate. China?€™s official purchasing managers?€™ index increased to 50.5 last month, the highest since September, data from the statistics bureau on Feb. 1 showed. India?€™s manufacturing grew at the fastest pace in eight months in January, HSBC Holdings Plc and Markit Economics reported the same day. The Institute for Supply Management?€™s US factory index rose to the highest level since June last month, the group said two days ago.

?€˜Healthy growth?€™

?€œThe European situation hasn?€™t been resolved, and that will impact the global economy, but we are still seeing growth,?€ said Colin O?€™Shea, the head of commodities at Hermes Investment Management Ltd. in London, which has about $US2 billion of raw-material assets. ?€œIt?€™s these areas that will lead the relatively healthy growth for 2012, which should also translate into higher demand and prices in commodity markets.?€

The US, the biggest consumer of crude and corn and the second-biggest buyer of metals, will grow 2.3 per cent this year, accelerating from 1.7 per cent in 2011, according to the median of 72 economist estimates compiled by Bloomberg.

Fed policy

Fed policy makers said Jan. 25 they will keep their target interest rate for overnight loans between banks near zero at least until late 2014 and didn?€™t rule out buying more bonds. The Fed set rates at a record low in December 2008 and has since bought $US2.3 trillion of debt in two rounds that ended in June 2011. During that period, the Standard & Poor?€™s GSCI Spot Index of commodities jumped more than 80 per cent.

?€œThere are strong fundamentals for commodities, particularly if the economy continues to improve,?€ said Christopher Burton, who is a New York-based portfolio manager at Credit Suisse Asset Management, helping oversee $US10.6 billion. ?€œThe US in particular seems to be getting stronger. There is still significant focus on what?€™s going on in Europe, especially the debt situation, but on the margins, things are looking more positive.?€

Hedge funds and other large speculators are holding a net- long position, or bets on higher prices, of 742,902 contracts across 18 US futures and options, up from 454,512 in December, CFTC data show. Open interest, or contracts outstanding, across 24 commodities traded in the US and Europe jumped to 10.43 million contracts on Jan. 31, from 9.54 million on Dec. 30, exchange data show.

?€œThe world didn?€™t end last quarter, and it increasingly looks like it?€™s not going to end,?€ said Marshall Berol, the chief investment officer at Malcolm H. Gissen & Associates in San Francisco, which manages about $US300 million of assets. ?€œPeople are realizing that there?€™s still growth going on around the world.?€

Bloomberg News

Authors: Commodities - Yahoo! News Search Results

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