Commodities set for a Surge Sluggish commodities set for surge
By Saijel Kishan and Pham-Duy Nguyen
Bloomberg News
https://www.iht.com/articles/2006/10/02/bloomberg/bxinvest.php
Published: October 3, 2006
LONDON Oil, gold and copper have bottomed-out in the past three weeks and may lead a rebound in the commodities markets, according to a growing minority of strategists.
"We are positioning for an upturn," said Michael Hoover, who manages investments at U.S. Trust's Excelsior Energy and Natural Resources Fund, which gained an average 20 percent a year during the past five years. "China is going to be the engine for growth."
He noted that China was the world's second-largest consumer of oil after the United States, and that it imports 23 percent of the world's copper.
"We think it's going to stay very strong," he said.
Oil will rise 10 percent to average $75 a barrel next year as China buys more fuel to keep its economy from slowing, said James Gutman, senior commodity analyst at Goldman Sachs Group. A weaker dollar will spur U.S. inflation and send gold up 15 percent to $700 an ounce in the next 12 months, said Michael Lewis, head of commodity research at Deutsche Bank.
Demand for raw materials is rising because of growth worldwide, economists said last week, even as commodity prices ended their biggest quarterly decline in at least 50 years.
China, for example, increased its 2006 growth forecast to 10.6 percent from 10 percent. India's economy, one of the largest in Asia, expanded at a faster- than-expected 8.9 percent last quarter, the Central Statistical Organization in New Delhi said. The International Monetary Fund forecast an above-average global expansion of 4.9 percent in 2007.
"We don't believe in a global recession," said Shawn Reynolds, who manages investments at Van Eck Global in New York. "We believe in growth in Brazil, India, China and the Middle East. We're being opportunistic and buying on dips." Even a U.S. expansion of 2 percent to 3 percent will be enough to sustain commodity demand, he said.
Signs of continued growth in Asia will extend the rally in energy and metals for years, Hoover said. Demand in the United States will accelerate at least until oil reaches $80 a barrel, from around $60 now, and retail gasoline climbs to $3.50 a gallon from about $2.40, he said.
"We have to conserve," Hoover said.
Crude oil gained 3.9 percent last week as Nigeria and Venezuela, both members of the Organization of Petroleum Exporting Countries, agreed to reduce exports to bolster prices. Gold in New York climbed for seven consecutive days, the longest rally since January, on forecasts for increased demand from jewelers. The Reuters/Jefferies CRB commodity price index rose 4.7 to 305.58 points, the first gain in a month, led by rallies in natural gas and heating oil.
"We've seen the bulk of price falls for energy and metals, so now is probably a good time to invest," said Christopher Wyke at Schroders, a money management firm in London. "We are getting calls from refugees from the commodity index-funds and also those who are weary of hedge funds." Wyke declined to give his specific forecasts.
Other commodities also have reasons to rise. Copper is up 69 percent this year as mine output fails to keep pace with rising demand. Orange juice gained 36 percent and reached a 16-year high, after hurricanes damaged citrus groves in Florida. Wheat touched a nine-year high last week as drought threatened to cut production by half in Australia.
"The tightness of supply is a great theme for commodities that's not going away," said Reynolds of Van Eck Global. "We are definitely a believer in the slow burn of an energy crisis. It's going to be around for a long time."
Investments in commodities may exceed $120 billion by 2008, compared with $80 billion last year, because pension funds are underweight in the markets, Barclays Capital estimates.
Of the $50 trillion invested worldwide, commodities represent less than 0.25 percent of the total, 10 percent of the money in hedge funds and less than a third of the market value of Exxon Mobil, according to Barclays.
"There are attractive buying opportunities for energy and agriculture at the moment, while investors should get ready for opportunities in metals in the next three to six months," said Gutman at Goldman.
Lewis of Deutsche Bank predicted that gold would rise to $700 an ounce in a year and then $780 a year later, compared with around $600 now, as the dollar weakens against major currencies. Oil probably will trade between $60 and $70 next year because OPEC will cut output to keep prices above $60, he said.
"The commodities space still has a lot of opportunities," Lewis said. "Commodities can still compete with the equity and bond markets for risk capital."
Pham-Duy Nguyen reported from Seattle.