Commodities Boom May Have Peaked as Fed Stimulus Fades
The biggest advances in commodities this year may be over because of mounting concern that policy makers aren’t doing enough to bolster economic growth at a time when producers are expanding supply.
The Standard & Poor’s GSCI gauge of 24 raw materials will end the year at 677, 3.1 percent higher than now, based on the median of 10 investor and analyst estimates compiled by Bloomberg. The index is 1.8 percent lower since the European Central Bank announced an unlimited bond-purchase program Sept. 6 and 3.8 percent below its level when the Federal Reserve pledged a third round of debt-buying Sept. 13.
That contrasts with a 92 percent surge from the end of 2008 through June 2011 as the Fed bought $2.3 trillion of debt in two bouts of quantitative easing. The impact will probably be smaller this time, Barclays Plc says. Prices are already in a bull market, the 17-nation euro area is contracting and China has slowed for six straight quarters. Europe and China represent about 60 percent of global copper demand and about 33 percent of crude-oil consumption.
“The investment demand that might be driven by people’s changed perception after Fed action is not going to sustain a further long-term move of the commodity complex,” said Michael Aronstein, the president of Marketfield Asset Management in New York who correctly predicted the slump in prices in 2008 and the rebound in 2009. “The longer you keep prices in all of these sectors elevated, the more supply you recruit.”
The S&P GSCI (DXY) rose 1.8 percent this year, heading for a fourth consecutive annual advance. Soybeans and wheat led the gains after the worst U.S. drought since 1956. The MSCI All- Country World Index of equities jumped 12 percent and the U.S. Dollar Index, a measure against six major trading partners, dropped 0.9 percent. Treasuries returned 1.6 percent, a Bank of America Corp. index shows.
Commodity assets under management reached $406 billion at the end of July, from $399 billion at the start of the year, based on Barclays’ estimates of money tied to exchange-traded products, medium-term notes and indexes. Assets reached a record $451 billion in April 2011. Open interest, or contracts outstanding, across the members of the S&P GSCI rose 16 percent this year, data compiled by Bloomberg show.
Morgan Stanley is forecasting supply surpluses in aluminum, nickel, zinc and thermal coal in 2013 and Barclays expects a glut in lead for at least a third consecutive year. The rally in aluminum and zinc makes production cuts in China less likely, prolonging excessive production, Macquarie Group Ltd. said in a report Sept. 17.
While the Paris-based International Energy Agency anticipates record demand for oil in 2013, it said in a monthly report Sept. 12 that inventories have become “more comfortable.” Natural-gas futures tumbled 27 percent in the past year in New York as production in the U.S., the biggest producer and consumer, advanced to a record.
Gold will probably be among the biggest winners from quantitative easing, say JPMorgan Chase & Co., Standard Bank Group and Credit Suisse Group AG. Some investors buy bullion as a hedge against inflation and a weaker dollar. The metal, which reached a six-month high of $1,779.50 an ounce yesterday, will advance to a record $2,400 by the end of 2014, assuming the stimulus lasts until then, Bank of America Corp. said.
“We view owning commodities and gold in particular as more attractive post the QE3 announcement,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “While the QE is there, it does keep the bid under commodities prices and gives them an opportunity to continue to move higher even with a sluggish economy.”
Central-bank action should boost prices across precious and industrial metals, JPMorgan said in a report Sept. 14, citing a probable decline in the dollar. Gold, silver, Brent crude oil and aluminum will probably rally more than other commodities, Standard Bank said in a Sept. 17 report.
The Fed will buy $40 billion of mortgage debt a month and hold the benchmark interest rate near zero through at least mid-2015. The ECB held its benchmark rate at a record low of 0.75 percent and said its program will target government bonds with maturities of one to three years. The Bank of Japan unexpectedly expanded its asset-purchase fund by 10 trillion yen ($126 billion) on Sept. 19. More than two-dozen nations cut market interest rates this year, data compiled by Bloomberg show.
The S&P GSCI in one year may be at 720 points, or about 10 percent higher than now, according to the Bloomberg survey. The International Monetary Fund expects global growth to accelerate to 3.9 percent next year, from 3.5 percent in 2012.
Commodities also may rally because of supply cuts. Morgan Stanley expects copper demand to outpace supply for a fourth year in 2013. The U.S. Department of Agriculture is forecasting the smallest global corn stockpiles in six years and the lowest soybean inventories in two decades after drought across the U.S. and Europe parched crops. Sanctions against Iran are crimping oil exports from what was once the second-biggest producer in the Organization of Petroleum Exporting Countries.
Hedge funds and other speculators remain bullish and held the biggest bet on rising prices in 16 months in the week ended Sept. 11, U.S. Commodity Futures Trading Commission data show. Holdings more than doubled since mid-June. That contrasts with a 95 percent reduction in the net-long position before the start of the first round of quantitative easing in December 2008.
‘Tug of War’
“This is not as much as a one-way ticket as it has been in the previous two instances,” said Sean Corrigan, the chief investment strategist at Diapason Commodities Management SA in Lausanne, Switzerland, which has about $7 billion invested in commodities. “The tug of war is between how much is already priced in and how much poorer is the underlying commodity demand because the world economy is in a much worse condition now.”
China, the biggest consumer of everything from coal to cotton to copper, set an annual growth target of 7.5 percent in March. It cut interest rates for the second time in less than a month in July and lowered reserve requirements three times between November and May. The government approved plans this month for a $158 billion subways-to-roads construction plan.
The economy of the euro area contracted 0.5 percent in the second quarter and probably won’t expand again until the second quarter of next year, according to the median of 24 economist estimates compiled by Bloomberg. The global economy is sliding into a “twilight zone,” caught between expansion and recession, and it “could go either way,” said Joachim Fels, the chief economist at Morgan Stanley in London.
Equities and high-yield debt probably will give greater returns than commodities, said Ashish Misra, the head of investment strategy at Lloyds TSB Banking Group in London. Its private banking unit manages about 11 billion pounds ($17.8 billion) of assets. Commodities have risen about fourfold since the end of 2001, during which the MSCI All-Country World Index gained 41 percent and Treasuries returned 77 percent.
“We’re heading for a period of underperformance in commodities after years of outperformance,” Misra said. “The effects of a slowdown in China and resumption of normal production trends in agriculture after this year’s drought- driven supply shocks should continue to pressure commodity prices downward.”
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