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.

A hole in the ground surrounded by liars

Mark Twain's definition of a gold mine. And it applied for the role of UBS on gold. UBS has again lowered its 2009 forecast for gold, this time from US$825 per ounce to US$700, while other investors rate gold as a buy in intermediate term.

The revised UBS commodity price outlook reflects an extended recessionary scenario with base metal prices in both 2009/2010 that are mostly below the marginal industry costs and current spot prices.

UBS believes gold will remain under pressure in 2009 from a combination of slowing demand for jewelry and disinvestment as inflation slows.

But many money managers hold the exactly opposite views and they believed there could be a price manipulation. I believe the purpose of this claim made by UBS is definitely of personal interest rate. Remember Goldman projected the oil will remain at $150 by the end of this year? Currently global monetary stimulus have addressed the economic downturn. So the interest rates around the world will continue to go on a downward path on the short end of the curve. And we've already seen this in the short term — the balance sheets of the governments are expanding at a historically unprecedented rate. So the supply figures will be shooting up.

From my perspective, this means that the value of currencies, whether in the US, Europe, or elsewhere, will likely decline relative to the value of gold. In intermediate-term prospect, gold is a good hedge against this extreme level of monetary reflation we're likely to see.

Gold also has the advantage of not being as linked to the physical cyclical demand environment that industrial metals face. We thus think gold is likely to appreciate over this intermediate period — for the next year or so — against most currencies.