Smallest Commodity Moves Since 1996 Signal Gold Gain

While wheat as much as doubled this year and cotton surged, the benchmark index for commodities is signaling neither inflation nor deflation, spurring investors to bet the best returns next quarter will be in precious metals.

The Standard & Poor’s GSCI Index of 24 raw materials, tracked by as much as $80 billion of investments, advanced 1.6 percent this year through Sept. 24, the smallest change since 1996. Record gold prices and a jump in copper were wiped out by slumping natural gas and oil prices as slowing growth in the U.S. and China, the biggest fuel consumers, sapped demand.

The rally in agricultural commodities has been more about a weaker dollar and the Russian drought than demand for raw materials, said Michael Pento, a senior economist at Euro Pacific Capital in New York, who correctly predicted the collapse in commodity prices in 2008. Investors accumulated record amounts of gold and silver this year to protect their wealth amid concern the world’s economy would falter.

“Global growth is not on a tear, primarily with the drag from developed countries on oil,” said Walter “Bucky” Hellwig, a Birmingham, Alabama-based senior vice president at BB&T Wealth Management, which oversees $17 billion. “If there’s a price increase there from higher demand, that’d be indicative of a rebound in the economy.”

U.S. consumer prices rose 1.1 percent in the 12 months ended in August, the Labor Department said Sept. 17, below the average 2.6 percent during the previous decade. The Federal Reserve indicated Sept. 21 that it’s now focused on inflation below the preferred long-term range. European Union inflation slowed to 1.6 percent in August, from 1.7 percent in July, the statistics office said Sept. 15.

‘Margin Compression’

Gains in agricultural commodities are raising consumer costs. Kraft Foods Inc., based in Northfield, Illinois, boosted U.S. prices twice since May on some types of coffee, and Bridgestone Corp. and Goodyear Tire & Rubber Co. announced higher charges for tires. Next Plc, the U.K.’s second-largest clothing retailer, said Sept. 15 that selling prices will rise by 5 percent to 8 percent in 2011 because of cotton.

Coffee traded in New York rose to its highest price since 1997 on Sept. 8, rubber touched a 21-month high in April in Tokyo and cotton reached a 15-year high today in New York.

Food companies may absorb commodity gains instead of passing them on to consumers, said Evan Smith, who helps manage $2 billion at U.S. Global Investors Inc. in San Antonio, Texas.

“Higher corn and wheat prices mean the buyers of those things, consumer goods and food manufacturers, will face some pricing-margin compression” because of the “tough economic environment,” he said.

Industrial Commodity Gains

While both the S&P GSCI and the Reuters/Jefferies CRB Index of 19 commodities are little changed this year, other gauges show something different. The Reuters/Jefferies CRB Spot Raw Industrials Index, which includes some goods that don’t trade actively on exchanges, such as copper scrap, burlap and cattle hides, rose 8.1 percent through Sept. 24. That may signal an impending rally, said Chris Rupkey, the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

“It looks like we’re poised to break out and go to all- time highs for commodity indexes, and that’s going to bring in more buying,” Rupkey said. He forecast a 20 percent jump in the Spot Raw Industrials Index to a record in three to six months.

Weightings, Slower Growth

The S&P GSCI is the most widely tracked commodities index, with $75 billion to $80 billion invested at the end of the first half, said Michael McGlone, the senior director of commodity indexing at S&P. The gauge is weighted about 67 percent toward energy, 16 percent to agriculture, 8.5 percent to industrial metals, 5 percent to livestock and 3.6 percent to precious metals.

The International Monetary Fund forecast in July that global growth will slow to 4.3 percent in 2011 from 4.6 percent this year. The euro zone may slow to 1.4 percent next year from 1.6 percent in 2010, China’s expansion may be 8.9 percent, down from 10 percent, and the U.S. will be at 2.5 percent, slipping from this year’s 2.7 percent, according to the median of as many as 62 economists’ estimates compiled by Bloomberg.

“As far as the idea of booming global growth, I just don’t see it,” Euro Pacific’s Pento said.

Oil closed today at $76.52 a barrel, almost half the record of $147.27 reached in July 2008. U.S. gasoline demand slid to the lowest level since October 2008 in the week ended Sept. 10, according to data from MasterCard Inc.

Haven Assets

Slowing growth sapped a gain of as much as 6.5 percent in the MSCI World Index of equities this year, leaving the gauge up 1 percent and driving investors to precious metals and other assets favored in times of financial stress. Treasuries returned 8.5 percent this year, according to an index from Bank of America Merrill Lynch, while holdings in exchange-traded products backed by gold and silver reached a record, data compiled by Bloomberg show.

Gold may rise to $1,315 an ounce by year-end, advancing 1.3 percent from $1,298.60 today, heading for a ninth straight quarter of gains and the longest rally since at least 1975, according to the median of 24 analyst estimates in a Bloomberg survey. Silver may climb 2.5 percent in the quarter to $22 an ounce, an eighth consecutive increase, the longest stretch in at least 35 years, the survey showed. Silver hit a 30-year high of $21.645 today.

The survey projected that copper, cocoa, coffee, sugar and soybeans will fall by Dec. 31, while cotton will rise. Corn, wheat and nickel may be little changed.

Crop Rallies

Wheat has jumped 30 percent in 2010, reaching $8.68 a bushel on Aug. 6, the highest price in almost two years and double this year’s low of $4.255 on June 9, as flooding in Canada and drought across Russia and the European Union ruined crops. Cotton rose 37 percent so far this year and touched $1.0393 a pound today, the highest level since 1995, as rain in China and Pakistan damaged fields. Arabica coffee in New York has rallied 34 percent and traded at $1.9865 a pound on Sept. 8, the highest price since 1997, as dry weather threatened trees in Brazil, the largest producer.

U.S. food prices may rise by 0.5 percent to 1.5 percent this year, compared with earlier forecasts of as much as 2.5 percent, the U.S. Department of Agriculture said on Aug. 25. Consumer prices will rise 1.5 percent in 2011, compared with an estimated 1.6 percent gain this year, based on the median in a Bloomberg survey of 57 economists.

“We’re definitely seeing some prices passed on, but our feeling right now is that inflation is not really a big concern,” said Christian Wagner, who helps oversee $175 million as chief investment officer of Longview Capital Management in Wilmington, Delaware. “We’re not considering that to be a very large fear until we see some constriction on monetary policy.”

To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net.

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net

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