Goldman Sees Commodity Recovery as Slump Erases $99 Billion
The commodities rout that knocked off $99 billion of market value last week is driving out speculators and leading Goldman Sachs Group Inc., which forecast the plunge, to predict a possible recovery.
The combination of slower growth in U.S. service industries and fewer German manufacturing orders helped drive the Standard & Poor’s GSCI Index of 24 commodities down 11 percent in five days, the most since December 2008, and erased all the gains since mid-March. Wheat, zinc and gold rebounded at the end of the week as U.S. payrolls exceeded economists’ forecasts, reducing concern that demand will weaken.
“Given the magnitude of the pullback, it does create an opportunity for more upside potential, particularly in the second half of this year, when fundamentals are expected to tighten,” Jeffrey Currie, the London-based head of commodity research at Goldman, said in a May 6 interview. A month ago, Currie told investors they should be “underweight” in commodities. “In the very near-term, we’d be a little cautious,” he says now.
The value of all 24 commodities tracked by the S&P GSCI index was about $805 billion on May 6, compared with $891 billion on April 29, according to data compiled by Bloomberg on the number of outstanding contracts and prices of futures closest to delivery. Combined holdings of exchange-traded products backed by precious metals fell to $119 billion from $132 billion, the data show.
Speculators retreated after investment funds had made near- record bets on price gains last month and the S&P GSCI reached the highest since August 2008. Commodities beat stocks, bonds and the dollar for five consecutive months through the end of April, the longest in at least 14 years, on forecasts for demand exceeding output in everything from oil to copper to corn.
The most influential analysts and fund managers are divided on where prices are headed. The last time the S&P GSCI fell this much, the index rebounded 12 percent the following week, and by the end of last month, it had more than doubled.
Bulls say the expanding global economy, led by growth in China, India and Brazil, is boosting demand at a time when producers from BHP Billiton Ltd., the largest mining company, to BP Plc, Europe’s second-biggest oil producer, can’t keep up.
Selling would be “premature,” and the rally will resume, said Hussein Allidina, the head of commodity research at Morgan Stanley in New York, reiterating comments made before the rout. “The decline we are seeing is not being driven by any meaningful change in fundamentals,” he said.
‘Not Turning Point’
“This is not a turning point,” said Kevin Norrish, a London-based managing director at Barclays Capital, whose commodities research team is ranked by Bloomberg in the top three for copper and gold. “We’d expect to see a pretty good recovery from these levels before too long.”
The S&P GSCI climbed 3.6 percent today, as silver futures jumped 5.2 percent and crude oil in New York added 5.5 percent.
Brent crude should rebound about 3 percent to $115 a barrel in coming weeks because violence in northern Africa and the Middle East continues, Christin Tuxen, an analyst at Danske Bank A/S in Copenhagen and the most-accurate oil forecaster tracked by Bloomberg over eight quarters, said on May 6. The fighting already curbed supply from Libya and increased concern that it may spread to regional producers including Saudi Arabia.
JPMorgan Chase & Co. raised its oil-price forecasts for this year and next on May 6 because it expects production to fall short of demand. Brent crude will average $120 in 2011 and 2012, from previous estimates of $110 and $114, the bank said. Oil prices should match or top their recent highs by next year, Goldman said in a note to clients on the same day.
The bears say that even if the economy grows, speculation is so excessive that prices no longer reflect supply and demand. The S&P GSCI Index is 39 percent higher than a year ago and more than twice where it was in February 2009, when economies were recovering from the global recession.
Commodities are at the start of a bear market that may last as long as five to 10 years, said Michael Aronstein, the president of Marketfield Asset Management in New York who correctly predicted the 2008 slump that drove the benchmark index down 66 percent in seven months.
The scale of investment means “supply and demand is almost meaningless,” Aronstein said in an interview May 6. “It’s almost like the last days of the tech bubble.”
Oil, which lost 15 percent last week in New York and 13 percent in London, became “detached from fundamentals,” said Oswald Clint, London-based head oil analyst at Sanford C. Bernstein, the joint-most-accurate oil forecaster tracked by Bloomberg in 2010. Brent could drop below $100 a barrel, he said. That’s about 14 percent lower than now.
About $9.61 billion went into commodity funds in the first quarter, more than triple the $2.77 billion a year earlier, EPFR Global, a Cambridge, Massachusetts-based research firm, said in a report in April. Energy funds attracted $10.9 billion, compared with a year-earlier outflow of $367 million.
A rebound in the dollar also dimmed the appeal for commodities that are priced in the U.S. currency. The Dollar Index, a measure against six counterparts, rose 2.6 percent last week, the most since August. The index has a negative correlation of 0.89 to the S&P GSCI Index. A figure of 1 would mean they move in lockstep. The currency gauge may drop to the lowest since July 2008 by the end of the year, estimates compiled by Bloomberg show.
“This is probably the beginning of a bear phase, even if it’s temporary, where the dollar and bonds will be more popular than commodities,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s fitting hand in glove with the U.S. slowdown story.”
The S&P GSCI’s five-day slump, the longest since August, began on May 2 and accelerated on May 5 by plunging 6.5 percent, the most since January 2009.
Silver led the rout after CME Group Inc., the owner of the Comex exchange, increased the cost of making new speculative positions by 84 percent in two weeks. Prices that advanced as much as 61 percent to $49.845 an ounce this year tumbled 27 percent last week to $35.287 on May 6. The metal may drop as low as $30 toward the end of the year before rebounding as gold rallies, said Dan Smith, the London-based analyst at Standard Chartered Plc, which predicted a decline in prices last month.
Gold also fell, declining 4.2 percent to $1,491.60 an ounce last week, after the Wall Street Journal reported May 4 that Soros Fund Management LLC, the hedge fund chaired by billionaire investor George Soros, sold some of its precious-metal holdings.
Bullion will advance to a record $1,650 by year-end, partly fueled by central banks buying to diversify their reserves, said Andrew Kaleel, chief executive officer of Sydney-based H3 Global Advisors Pty Ltd., which has a commodity hedge fund managing about A$600 million ($642 million).
Mexico, Russia and Thailand bought about a combined $6 billion of bullion in February and March, International Monetary Fund data show. Since the end of 2009, countries including India, Sri Lanka, Mauritius and Bangladesh have bought metal. Central banks are expanding their gold reserves for the first time in a generation as bullion rises for an 11th consecutive year, the longest winning streak since at least 1920.
The killing of al-Qaeda leader Osama bin Laden may have been the catalyst for this week’s slide in oil, the biggest exchange-traded commodity by value. Crude had surged as much as 25 percent this year as violence swept through northern Africa and the Middle East, disrupting 1.3 million barrels a day from Libya and raising concerns of shortages from the Persian Gulf. Since bin Laden’s death was announced, traders shifted their focus to prospects of weaker demand.
Service industries in the U.S. expanded in April at the slowest pace in eight months, the Institute for Supply Management said May 4. Applications for jobless benefits jumped the most since August in the week ended April 30, the Labor Department said May 5. That was tempered by a report from the department a day later showing payrolls increased last month by the most since May 2010.
Factory orders in Germany, Europe’s largest economy, unexpectedly dropped 4 percent in March, the Economy Ministry said May 5. The country’s industrial production rose for a third time the same month, the ministry said the next day.
Central bankers also helped drive commodities lower last week by indicating their intention to cool growth to combat inflation. Rates rose in more than two-dozen countries this year, according to data compiled by Bloomberg.
European Central Bank President Jean-Claude Trichet said May 6 that policy makers are “extremely alert” on inflation after they raised interest rates on April 7, joining China, India, Poland and Sweden in seeking to control consumer prices with tighter monetary policy. Trichet said he may take further decisions on rates after new economic projections in June.
While every commodity tracked by the S&P GSCI fell last week, some rebounded May 6. Wheat futures rose 2 percent on the Kansas City Board of Trade as drought and flooding threatened crops in North America, Europe and Asia. Cocoa, cattle, zinc, gold, copper, nickel and soybeans also gained.
Lower prices also may spur more demand. Barclays, which told investors in a report May 6 to use the slump to buy, is forecasting shortfalls in production this year for copper, nickel, tin, lead, platinum and palladium. Rabobank expects demand to exceed output in corn and cotton, according to a report last month.
“Ultimately, supply remains weak, and demand remains strong, and that’s why they will eventually go higher,” said John Stephenson, who helps manage $2.6 billion at First Asset Investment Management Inc. in Toronto. “Commodities, in the worst case, will start firming by late August, but in the meantime, I would see this as a buying opportunity.”
Oil demand will exceed supply this year, the U.S. Energy Department said in a report April 12. Billionaire hedge-fund manager T. Boone Pickens said May 3 that prices will rise.
“If you look at the fourth-quarter projection for oil, that’s 90 million barrels a day globally, and I don’t think the world can produce more than 88 million,” Pickens said in an interview from Los Angeles with Willow Bay and Lisa Murphy on Bloomberg Television’s “Fast Forward.”
For now, funds are probably still trimming bets on higher commodity prices. Net-long positions held by managed-money funds fell 2.4 percent to 1.45 million futures and options in the week ended May 3, Commodity Futures Trading Commission data show. They reached a record 1.56 million contracts in October.
Open interest in 17 of 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index dropped 0.6 percent to 8.15 million contracts, data from the CFTC show. That compares with an all-time high of 8.6 million on Feb. 18.
“I don’t think the commodities boom is over,” said Robbert Van Batenburg, an analyst at Louis Capital Markets in New York, who correctly predicted a 2007 rebound in oil. “We may see a pause in the rally, and that’s OK. Past the summer doldrums, I think the rally picks up where we left off.”