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Commodities Beat Financial Assets Making Silver, Zinc Top Picks for 2011
By Nicholas Larkin, Pham-Duy Nguyen and Tony C. Dreibus - Dec 28, 2010
At a time when money managers’ concerns have swung between record government stimulus and the potential for a new recession, investors remain bullish on commodities that beat stocks and bonds for a second year.
The benchmark Standard & Poor’s GSCI gauge advanced 20 percent, more than the 9.1 percent gain in the MSCI World Index of stocks and 5.3 percent return on a Bank of America Merrill Lynch index of Treasuries. Currency traders are betting on a stronger dollar, sending a contrarian signal because commodities moved in an opposite direction to the currency in 16 of the past 20 quarters, data compiled by Bloomberg show.
Silver, an investment and an industrial material, will jump as much as 37 percent next year, leading gains in the 15 commodities covered in a Bloomberg survey of more than 100 analysts, traders and investors. Zinc, this year’s worst- performing metal, will appreciate 21 percent. Arabica coffee, which reached a 13-year high last week, will be the weakest performer, adding no more than about 7 percent.
The strength in demand “has been a surprise considering that we’ve just come out of the worst recession since the 1930s and carnage in most asset classes,” London-based Roxana Mohammadian-Molina, one of a team of 18 analysts at Barclays Capital who correctly called the bottom in oil and copper last year, said by phone Dec. 22. The bank says U.S. natural gas, will be the only one of the 25 commodity prices it follows that will average less next year.
Stocks Short
Global stocks are still about $11 trillion short of the record $62.6 trillion of market capitalization reached in October 2007, data compiled by Bloomberg show. Over the same period, commodity assets under management rose about 80 percent to $354 billion, and will attract a total of $60 billion in new money this year, the second most after 2009, Barclays estimates.
The S&P GSCI Index is extending last year’s 50 percent advance, which also beat the 27 percent jump in the MSCI World Index and the 3.7 percent loss on Treasuries.
Investors favored raw materials this year as China, the biggest user of everything from coal to iron ore to zinc, led the recovery from the first global recession since World War II. With economies now expanding, competition for raw materials is intensifying.
U.S. growth will rise to 3.25 percent in the fourth quarter of 2011, from 2.5 percent in the first, according to the median estimates of as many as 66 economists surveyed by Bloomberg. China’s will slow to 9 percent next year from 10 percent in 2010, still three times the rate of the U.S. and six times the speed of the euro zone, the surveys show. China on Dec. 26 raised interest rates to counter inflation.
Goldman’s Picks
Commodities gaining the most will be those in which China is least self-sufficient and with the smallest spare production capacity, according to Goldman Sachs Group Inc. analysts led by London-based Jeffrey Currie. Oil, copper, cotton, soybeans and platinum are the bank’s top picks.
Goldman on Dec. 13 forecast an 18 percent advance in raw materials in 12 months, led by a 28 percent gain in precious metals. That tallies with the results of the Bloomberg survey.
Silver, the precious metal most used in industry, will rise 37 percent to as high as $40 an ounce next year from $29.1238 an ounce Dec. 24 in trading in London, the survey shows. Palladium, used in catalytic converters for cars, will jump as much as 18 percent to $900 an ounce from $764 in trading in London Dec. 24.
Silver futures for March delivery rose 53 cents, or 1.8 percent, to $29.785 an ounce at 10:14 a.m. on the Comex in New York. Palladium futures for March delivery gained $11.90, or 1.6 percent, to $779 an ounce on the New York Mercantile Exchange.
Markets in London are closed for a second day today for public holidays.
Gold Outlook
“Investors will be cycling out of gold and into silver, platinum and palladium if financial and economic conditions improve,” said Jeffrey Christian, managing director of CPM Group, a research company in New York.
Christian correctly predicted in January that gold would reach $1,400 an ounce this year and is now forecasting prices to peak at $1,550 in the first quarter before declining as low as $1,200. The median forecast in the Bloomberg survey is for a 23 percent gain to as high as $1,700. Gold reached a record $1,431.25 Dec. 7 in London and closed at $1,381.47 Dec. 24.
Gold futures for February delivery rose $18.70 or 1.4 percent, to $1,401.60 on the Comex.
The popularity of precious metals suggests investors are seeking safety as governments and central banks pump money into economies to shore up recovery.
The Federal Reserve has kept its benchmark interest rate near zero since December 2008 and plans to inject $600 billion into the economy through June by purchasing government bonds through so-called quantitative easing. It already bought $1.7 trillion of securities in a first phase that ended in March.
Fiscal ‘Concern’
“I like gold because I’m concerned that our fiscal and monetary policies don’t make any sense,” David Einhorn, the president of Greenlight Capital Inc., which manages about $6.8 billion of assets, said in an interview in New York. “It leads potentially to a risk of greater instability later.”
Investors increased precious-metals holdings by 22 percent to a record 17,390 metric tons in the 10 months to Dec. 17, data compiled by Bloomberg show. That’s worth about $111 billion, of which 84 percent is in gold and 13 percent in silver, with the remainder in platinum and palladium.
GSCI Returns
Returns for commodity investors may be lower than the spot index suggests. The S&P GSCI Total Return Index, tracking the net amount received, rose 8.4 percent this year, reflecting the cost of maintaining positions in futures markets. When longer- dated contracts cost more than those for immediate delivery, a market structure known as contango, investors pay a premium to maintain their holdings as positions expire.
Gains in commodities may evaporate if currency traders’ bets that the dollar will strengthen are right.
Contracts on the dollar appreciating against the euro are at a three-month high and the U.S. Dollar Index gauge against six counterparts rose 6 percent since Nov. 4. The inverse relationship between the currency market and commodities last month reached the highest level in more than a year, data compiled by Bloomberg show.
Commodity experts in the Bloomberg survey are betting this time will be different amid surging demand and dwindling stockpiles.
Copper Deficit
Copper use will outpace supply by 825,000 tons next year, more than twice the inventory in LME-monitored warehouses, according to Barclays Capital. Prices which reached a record $9,392 a ton on Dec. 21 in London will rise to $10,475 next year, the Bloomberg survey shows. Zinc will be the best- performing industrial metal, advancing as much as 21 percent to $2,800 a ton from $2,308 in London on Dec. 24.
Copper futures for delivery in March rose 2.25 cents, or 0.5 percent, to $4.3025 a pound on the Comex. Earlier, the metal climbed to an all-time high of $4.3195.
Demand may also come from new exchange-traded products. ETF Securities Ltd. started offering investors ETPs backed by copper, tin and nickel this month, attracting about $25 million so far. JPMorgan Chase & Co., BlackRock Inc. and Credit Suisse Group AG also plan similar products.
Weather Markets
A stronger dollar may also be trumped by weather in agricultural markets. Wheat as much as doubled since June and corn jumped 83 percent as Russia’s worst drought in at least a half century, flooding in Canada and parched fields in Kazakhstan and Europe ruined crops.
While wheat should rise as much as 17 percent to $9.13 a bushel next year from $7.83 in Chicago on Dec. 23 and corn 14 percent to $7 a bushel from $6.14, coffee was picked as likely to be the worst performer in the Bloomberg survey. Analysts see a gain of no more than 7 percent to $2.53 a pound from $2.359 a pound in New York on Dec. 23.
Wheat futures for March delivery climbed 8.5 cents, or 1.1 percent, to $7.8875 a bushel today on the Chicago Board of Trade. Corn futures for March delivery rose 3.5 cents, or 0.6 percent, to $6.1875 a bushel, the eighth straight gain. Arabica- coffee futures for March delivery rose 1.05 cent, or 0.4 percent, to $2.385 a pound on ICE Futures U.S. in New York.
“We don’t see an imminent threat to commodity prices in 2011,” said Evan Smith, who helps manage $900 million at U.S. Global Investors Inc. in San Antonio. “You will still have concern over currency stability and in emerging economies there’s the wealth effect that’s driving demand.”
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