New York, 20 September Commodities investors rang up big gains during September’s rally, but people putting new money into the oil, metals and grains markets must brace themselves for more volatility going forward.
Record oil prices for seven consecutive trading days have helped create a near 40% profit for energy bulls this year. That alone should convince any investor about the spark commodities could bring to a portfolio dependent on just stocks and bonds, analysts say.
Add historic highs in wheat and this week’s 28-year peaks in gold, and the attraction of diversifying into natural resource markets becomes greater -- if investors have the nerve for the ups and downs that follow.
“The volatility in commodities is problematic for a lot of people to deal with,” said Rian Akey, chief operating officer of Cole Partners, a Chicago asset manager with a $120 million fund investing in only commodity-linked products and futures.
“Even if the long-time trend is up, you still have periods where you’re going to be down 10% in a month, and that’s quite difficult for most people to deal with,” Akey said.
Investment banks have estimated over the last two years that there are between $100 million and $200 million parked in global resource markets and the myriads of derivatives linked to them. Few doubt that there will be an exponential growth in investments in coming years if some of the most sought-after raw materials, like corn and copper, remain in tight supply.
But analysts are unsure whether the strategy of most investors will bring out the best value in commodities as a portfolio diversifier, or perpetuate a “too risky” image.
The biggest pension funds, which once invested in only equities and fixed income, now put millions of dollars into commodity futures indexes, expecting slow, steady gains.
But speculators, including hedge funds, try to make a fast buck in these markets with trades that often distort prices and sometimes trigger massive counter moves that burn them.
“Except for oil, most commodities markets are not really big markets and small shifts in capital from a larger market into commodities can really distort things,” said David Krein, head of New York investment advisory DTB Capital.
Krein says he has a consistent message for clients seeking opportunities in commodities: “Stick with a long-only or lightly-leveraged portfolio base, and stay the course.”
Long-term factors signal win
Despite their risky tag, commodities lately have outperformed stocks and bonds as Wall Street reeled amid uncertainties in the US economy brought on by a crisis in subprime or poor-risk loans. When the Federal Reserve slashed interest rates this week to ward off a possible US economic slowdown, stocks recovered but commodities also surged.
Analysts have identified many trends that support higher commodity prices, such as the industrialization of emerging market giants Brazil, Russia, India and China; constraints in the mining of minerals; and bottlenecks in delivering processed raw materials to market.
Michael Cuggino, president of San Francisco’s Pacific Heights Management, which has invested a quarter of its $1.3 billion funds in precious metals, said gold will trump recent highs of $735 an ounce as the dollar reels further after the Fed rate cut.
Kevin Bambrough of Sprott Asset Management, whose $4 billion funds also are invested partly in gold, said inflation was almost certain in all dollar-denominated commodities as China tries to use up US sovereign paper in its hold.
Investment banks are singing the bullish tune too. Goldman Sachs called on clients this week to stay “overweight” on commodities and doubled its forecast for next year’s returns from its one-time commodity index, run now by Standard & Poors. Barclays Capital, in a note issued on 20 September, asked investors to “love the rhythm” coming from commodities.
A Reuters story this week showed some energy experts were expecting US crude prices, just above $80 a barrel now, to ultimately hit $100 after crashing to $50 first. Reuters