Speculators cut bets on commodities but Goldman still bullish

Business Times - 20 Dec 2011

(NEW YORK) Speculators reduced bets on commodities to a 31-month low on mounting concern that global economic growth is slowing as Goldman Sachs Group and Barclays Capital reiterated predictions that prices will gain.

Money managers cut combined net-long positions across 18 US futures and options by 9.6 per cent to 532,521 contracts in the week ended Dec 13, Commodity Futures Trading Commission data show. That's the lowest since April 28, 2009. Wagers on gold dropped to an eight-week low and coffee holdings tumbled 60 per cent, the most since August.

Funds are less bullish after Moody's Investors Service said it is reviewing Europe's ratings and the International Monetary Fund said the region's fiscal crisis is 'escalating.' Europe accounts for 19 per cent of global copper demand and consumes about one in six barrels of the world's oil.

Manufacturing in China, the biggest buyer of everything from nickel to soybeans, may contract for a second month, a private survey showed.

'For most people, the fetal position is quickly becoming their portfolio position,' said John Stephenson, who helps to manage US$2.6 billion of assets at First Asset Investment Management in Toronto. 'It could get a lot uglier.'

The Standard & Poor's GSCI Index of 24 commodities dropped 4.5 per cent last week, the most since mid-September, led by industrial and precious metals. The MSCI All-Country World Index fell 3.4 per cent as more than US$1.7 trillion was wiped off the value of global equities.

The Dollar Index, a measure against six trading partners, climbed 2.1 per cent. The yield on 10-year Treasuries dropped 21 basis points, or 0.2 percentage point, to 1.85 per cent according to Bloomberg Bond Trader prices.

Goldman Sachs said in a report Dec 1 that the world is likely to avoid a recession and maintained its 'overweight' allocation to commodities, predicting a 15 per cent return in the next 12 months. That is still the bank's view, Sophie Bullock, a London-based spokeswoman for Goldman, said in response to questions on Dec 15.

'We are cautiously positive on commodities, and that view hasn't changed,' said Sudakshina Unnikrishnan, an analyst at Barclays Capital in London. A close balance between supply and demand across raw materials 'could drive a strong price rebound in early 2012,' the bank said in a report this month.

The S&P GSCI gauge tumbled 19 per cent since reaching a 32-month high in April. Cooling expansion in emerging markets will spur further declines for raw materials, according to Michael Aronstein, the investor who said in early May that commodities were entering a multiyear bear market.

'People are just coming around to the understanding that things in the developing world are in a fairly serious retreat,' said Mr Aronstein, the president of Marketfield Asset Management in New York, who correctly predicted the 2008 slump that drove the S&P GSCI down 66 per cent in seven months.

Chinese factory output may decline for a second month in December as Europe's debt crisis weighs on exports and home sales slide, preliminary results from a Markit Economics survey indicated on Dec 15. In the euro area, manufacturing may contract for a fifth consecutive month, a separate report from London-based Markit Economics showed.

Options traders are paying the most since August 2010 to protect against losses in Chinese stocks. The Asian nation's gross domestic product will grow by 8.5 per cent in 2012, down from 9.2 per cent this year and 10.4 per cent in 2010, according to the median estimate of 15 economists surveyed by Bloomberg.

The euro dropped below US$1.30 last week for the first time since January on signs of rising funding stress in the region. German Chancellor Angela Merkel said there is no easy solution to the crisis after rejecting an increase in the upper limit of funding for a permanent bailout programme.

'The macro outlook remains poor heading into 2012 with risks skewed to the downside,' Morgan Stanley commodity analysts led by New York- based Hussein Allidina said in a report Dec 16. 'We are in the early stages of a multi-year deleveraging and de-globalisation cycle.' A crunch in financing for commodity trading, spurred by 'aggressive, sustained European bank deleveraging,' may send raw-material prices plunging next year, said Deutsche Bank AG in a report on Dec 5.

Investors put US$156 million into commodity funds in the week ended Dec 14, according to data from EPFR Global, which tracks investment flows. Gold and precious metal net inflows were US$738 million, while non-precious metal commodities had a net outflow of US$582 million, said Cameron Brandt, the director of research at the Cambridge, Massachusetts-based research company.

Funds trimmed their net-long position in gold by 11 per cent to 135,117 contracts, the lowest since Oct 18, the CFTC data show. Holdings have dropped in three of the past four weeks\. \-- Bloomberg

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