Commodity Investment Expected To Remain Strong

An improving economy is seen boosting demand for raw materials, and cost-cutting during the recession by producers such as mining companies constrained output, making commodities an attractive alternative asset class.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Barclays Capital has estimated that inflows into commodity investments during 2009 will be a record $60 billion, topping $51 billion from 2006, said analyst Amrita Sen. The figure includes retail and institutional flows into commodity indexes, exchange-traded products and structured notes.

Of some 250 investors surveyed by Barclays in December, 63% said they intend to increase commodity investment over the next three years and 26% said they expect to maintain exposure at current levels.

Furthermore, 60% said they were investing in commodities for 'absolute returns,' anticipating further upside in prices. Still, Ms. Sen said, the scale of price rises is unlikely to match this year, when some commodities doubled, in large part due to hopes for eventual economic recovery and investment demand.

Total commodities assets under management are seen at $250 billion after the fourth quarter, lower than a record $275 billion the second quarter of 2008 because the price of many commodities is lower.

Much of the investment in 2009 was concentrated in gold, with big inflows into exchange-traded products in the first quarter. Since, investment picked up in commodity index funds, particularly from institutional investors, Ms. Sen said. This was due to a combination of portfolio diversification and a desire to take advantage of the sharp fall in commodity prices in late 2008 as the global credit crisis hit.

'If you believe in the industrialization and urbanization story of China and India, you would have to appreciate that commodity prices fell to levels that were far below equilibrium and were seen as very attractive entry points for institutional investors,' she said.

The long-term picture remains constructive as demand rises from nations such as <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />China and India that posted economic growth in 2009 despite weakness in the Western world, she said. Meanwhile, supplies are limited, exacerbated by the recession when companies cut costs by reducing capital expenditures for mines and oil fields.

'That caused a lot of delays and curtailed a number of projects that will continue to constrain supply,' said Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund.

MF Global analyst Edward Meir also looks for good investment demand in early 2010 as the dollar remains weak. Because commodities are dollar-denominated, a weaker greenback makes commodities cheaper in other currencies. However, Mr. Meir suggested that eventually the money flowing into commodities could wane if the Federal Reserve starts to tighten money supply and the dollar firms.