New York: Money managers are making near-record bets on higher commodity prices, aligning themselves with Morgan Stanley after Goldman Sachs Group Inc. said investors should reduce most of their holdings.
Funds held a net 1.49 million futures and options in 18 commodities by 26 April, 57% more than a year earlier, according to US Commodity Futures Trading Commission data compiled by Bloomberg. The Standard and Poor’s GSCI Total Return Index of 24 commodities beat bonds, stocks and the dollar every month since December, the longest in at least 14 years. It rose in April for an eighth month, the best stretch since 2004.
“The surge in everything from oil to corn to gold has yet to crimp demand, inventories are still tight, and getting out now would be premature,” Hussein Allidina, the head of commodity research at Morgan Stanley in New York, said on 29 April. Prices may no longer reflect supply and demand, and they are likely to drop in the next three to six months before rebounding, Goldman said in reports on 11 April and 15 April.
“The underlying demand, based on global growth and supply constraints, makes that kind of call dangerous,” said Walter Bucky Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, and correctly predicted a decline in commodity prices two years ago, before the S&P GSCI began a 15% drop.
“As an investor, I would rather focus on fundamentals, and fundamentals are still positive,” Hellwig said. The trend will be higher over the next three months.
Goldman, the most profitable securities firm in Wall Street history before converting to a bank in 2008, recommended on 1 December that investors buy a basket of commodities consisting of crude, copper, cotton, platinum and soybeans. The research team, led by Jeffrey Currie in London, said on 11 April that investors should close that trade after it returned 25%.
There are signs US oil demand is weakening, speculators are betting the most ever on higher prices, and there may be less chance of violence spreading from a civil war in Libya, Africa’s third largest crude producer, the team said in a 15 April report. Higher energy costs and manufacturing disruptions caused by an earthquake in Japan on 11 March may mean less consumption of copper and platinum, the bank said.
Goldman also advised clients to end a separate bullish bet on copper, which it had recommended in October, after prices rose 23%, and one on platinum, made in July 2009, after a 36% advance. Investors should still buy European gasoil, soybeans and gold, the bank said, reiterating advice in October and November. The New York-based bank recommends being underweight on commodities in the next three to six months.
The S&P GSCI Enhanced Total Return Index, Goldman’s benchmark for commodities, rose 0.4% since the note to clients on 11 April. The team expects the gauge of 24 raw materials to rise 10% in the 12 months from that date, less than the 14% previously forecast.
Copper fell 8.5% from the record $10,190 a tonne reached on 15 February, and cotton slumped 30% from the all-time high of $2.197 a pound set on 7 March. At the same time, oil advanced 24% this year, and gold reached a peak of $1,577.40 an ounce on Monday, heading for an 11th consecutive annual gain.
Morgan Stanley, operator of the world’s largest brokerage, is still very long on crude and corn, and favours wheat and gold, Allidina said in a 29 April telephone interview.
Since 15 December, 2009, when the bank advised investors to buy the oil for delivery in December 2011 on the New York Mercantile Exchange, that contract has gained 38%. The firm is bearish on sugar, natural gas, cotton and coffee, he said.
“Betting on lower commodity prices, broadly speaking, right now is not a good idea, because you do have tight inventories,” Allidina said. “You need to ration demand. You are not doing that at current prices,” he said.
Investors held a record $412 billion of raw-material assets by the end of March, almost 50% more than a year earlier, Barclays Capital estimates.
Net long positions held by managed-money funds are within 4.8% of the record 1.56 million contracts reached in October, CFTC data show. Open interest in 17 of 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index reached 8.2 million contracts, data from the CFTC show. That compares with an all-time high of 8.6 million on 18 February.
The most accurate forecasters tracked by Bloomberg over the last eight quarters expect more records this year. Copper may rise 10% to $10,250 a tonne within six months, according to Christin Tuxen, an analyst at Danske Bank AS in Copenhagen.
Gold will advance 12% to $1,750 an ounce, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich. Corn is likely to gain 8.9% to a record $8 a bushel, according to Commerzbank AG, last year’s most-accurate forecaster.
Crude will rise 28% to $145 a barrel, near the record $147.27 set in July 2008, said Michael Pento, the senior economist at Euro Pacific Capital Inc. in New York who correctly predicted the collapse in commodity prices in 2008, the rebound in 2009 and last year’s rally in gold.
Claudia Carpenter in London, Christine Harper in New York and Steve Stroth in Chicago contributed to this story.