Commodities to Get Record $60 Billion

Commodities will likely attract a record $60 billion this year as investors seek to diversify their assets. Inflows so far this year are almost $55 billion, already more than the previous full-year record of $51 billion set in 2006, Barclays Capital said in a report. Total commodity assets under management will probably expand to $230 billion to $240 billion by the end of the year.

Sharp falls in commodity prices earlier in the year created opportunities for long-term exposure, providing an opportunity for investors to act on their interest in commodities as a diversification tool.

The S&P GSCI Index of 24 commodities rose 46 percent this year, rebounding from last year’s 43 percent slump, as governments spent at least $12 trillion to lift their economies from the worst recession since World War II. Copper, lead and sugar doubled and gold reached a record.
A strong end to the year for commodity prices does look likely, especially if the dollar continues to weaken, which should be especially beneficial for gold.

Commodity funds accounted for almost three-quarters of inflows this year, including bonds, equity and emerging markets. Investment products linked to commodities attracted $1.34 billion in the week ended Nov. 18, the most in 3 1/2 years, bringing the year-to-date total to $13 billion.

Funds investing in physical commodities, rather than stocks of commodity producers, dominated the action.

Gold output set for decline

The world’s top gold mining companies have warned that global production of the precious metal is likely to resume a long-term decline in coming years, in spite of a record-breaking surge in the price.

Much of gold’s recent rise to an all-time high of $1,122.85 last week has been due to the weaker dollar and huge inflows into ETFs, as investors have sought sanctuary from the financial crisis by buying physical assets.

Some people believe that there was ample scope for output to increase over the next year in response to rising prices and after years of stagnating production. That and any rally in the dollar could lead to a correction in the gold price.

Longer-term supply constraints, however, could underpin prices. Supply will not be a deciding factor, but on balance it should be a price support.

Global gold mine production will rise 3.7 per cent in 2009 to 2,502 tonnes, largely because of strong Indonesian production. But that is just an interruption to a downward trend, not a secular shift back to growth. Any increase in mine supply in the near term would be “artificial” – and due to marginal projects being restarted because of the high price.

That is especially true in South Africa, which until 2007 was the world’s leading producer and where the economics of bringing gold to the surface in some deep, ageing mines is being questioned. Costs are going up and grades are going down.