Gold Seen Outperforming as Commodity Bull Run Stalls Near-Term

Gold may outperform other commodities as the bull run in raw materials pauses amid slowing economies. Commodities will likely lack direction for the next 12 months and investors will focus more on relative-value trades. Many experts are favoring precious metals during this time and do not see gold in a "bubble" at their current prices.

By Maria Kolesnikova
October 25, 2012
BusinessWeek

Gold may outperform other commodities as the bull run in raw materials pauses amid slowing economies, while grains and oilseeds may jump on weather disruptions, according to participants at the World Commodities Week conference.

Commodities will likely lack direction for the next 12 months, meaning investors will focus more on relative-value trades, according to Tiberius Asset Management AG. Deutsche Bank AG favors precious metals and is neutral on oil and industrial metals, Michael Lewis, head of commodities research at the bank, said today at the conference in London. Bullion isn’t in a “bubble” at current prices, he said.

“The markets will go sideways in a volatile environment” in the short term, said Christoph Eibl, a founding partner of Zug, Switzerland-based Tiberius.

Commodities erased their gains for the year on Oct. 23 on concern demand for energy, industrial metals and some agricultural products will slump as economic growth decelerates. Raw materials, as measured by the Standard & Poor’s GSCI Index of 24 commodities, made annual advances in 11 of the last 13 years. The gauge’s last annual drop was in 2008.

The International Monetary Fund cut its 2012 global growth forecast to 3.3 percent on Oct. 9, compared with a July prediction of 3.5 percent, and expects the euro area to contract 0.4 percent. Growth in China, the biggest user of everything from copper to cotton, has slowed for seven consecutive quarters.

The S&P GSCI gauge is down 1.2 percent this year and the MSCI All-Country World Index (MXWD) of equities gained 10 percent. The U.S. Dollar Index, a measure against six major trading partners, fell 0.3 percent.

Fiscal Cliff

Gold won’t become a bubble unless prices rise to a record above $2,200 an ounce, while oil and industrial metals are vulnerable to risks associated with the so-called fiscal cliff in the U.S., said Lewis of Frankfurt-based Deutsche Bank. He was referring to $607 billion in federal spending cuts and tax increases scheduled to take effect in January unless the U.S. Congress intervenes.

Gold is up 9.7 percent this year and traded at $1,715.53 an ounce by 4:10 p.m. in London. Central banks have been expanding gold reserves after the metal climbed the past 11 years and investors boosted holdings in bullion-backed exchange-traded products to a record. Nations bought 254.2 tons in the first half of 2012 and may add close to 500 tons for the year as a whole, the London-based World Gold Council said in August.

Quantitative Easing

The U.S. Federal Reserve said Sept. 13 it will buy $40 billion of mortgage debt a month in the third round of so-called quantitative easing and probably hold the federal funds rate near zero until at least the middle of 2015. Gold prices almost doubled from December 2008 to June 2011 as the central bank bought $2.3 trillion of debt in two rounds of QE.

“Precarious” inventory levels in some agricultural products, such as soybeans and corn, mean there is little room in the market to absorb any supply shocks, Lewis said. Rising inflation related to food prices may prevent emerging markets countries from introducing more easing measures that could have boosted demand for other raw materials, he said.

“The hardest area to play in commodities is agriculture,” said Chris Armitage, the U.K. managing director at FourWinds Capital Management, which oversees about $1 billion in natural- resource funds.

The U.S. Department of Agriculture estimated in June that the U.S. would harvest a record 14.79 billion bushels of corn, before slashing its forecast to 10.7 billion bushels, following the worst drought in half a century. Wheat has rallied 36 percent in Chicago this year, while soybeans are up 30 percent and corn has gained 17 percent.

Assets Under Management

Commodity assets under management reached $423 billion at the end of August, from $395 billion at the start of the year, based on Barclays Plc’s estimates of money tied to exchange- traded products, medium-term notes and indexes, according to an Oct. 1 report. Assets reached a record $451 billion in April 2011.

About $50 billion of investments is tracking commodity indexes other than the two biggest, the S&P GSCI and the Dow Jones-UBS Commodity Index, according to Dan Raab, head of commodity investor marketing and structuring at UBS Securities LLC.

“Commodities as an asset class absolutely can’t be ignored,” Raab said. “Consumption of raw materials and use of commodities is likely to increase in the next 20 to 30 years.”

To contact the reporter on this story: Maria Kolesnikova in London at mkolesnikova@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

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