Morgan Aligned With Commodity Bulls as Goldman Says Sell


Money managers are making near-record bets on higher commodity prices, aligning themselves with Morgan Stanley after Goldman Sachs Group Inc. said investors should reduce most of their holdings. Funds held a net 1.49 million futures and options in 18 commodities by April 26, 57 percent more than a year earlier, according to U.S. Commodity Futures Trading Commission data compiled by Bloomberg. The Standard & Poor’s GSCI Total Return Index of 24 commodities beat bonds, stocks and the dollar every month since December, the longest in at least 14 years. It rose in April for an eighth month, the best stretch since 2004.

The surge in everything from oil to corn to gold has yet to crimp demand, inventories are still tight, and getting out now would be “premature,” Hussein Allidina, the head of commodity research at Morgan Stanley in New York, said on April 29. Prices may no longer reflect supply and demand, and they are likely to drop in the next three to six months before rebounding, Goldman said in reports April 11 and April 15. “The underlying demand, based on global growth and supply constraints, makes that kind of call dangerous,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, and correctly predicted a decline in commodity prices two years ago, before the S&P GSCI began a 15 percent drop.

“As an investor, I would rather focus on fundamentals, and fundamentals are still positive,” Hellwig said. “The trend will be higher over the next three months.”

Most Profitable

Goldman, the most profitable securities firm in Wall Street history before converting to a bank in 2008, recommended Dec. 1 that investors buy a basket of commodities consisting of crude, copper, cotton, platinum and soybeans. The research team, led by Jeffrey Currie in London, said on April 11 that investors should close that trade after it returned 25 percent. There are signs U.S. oil demand is weakening, speculators are betting the most ever on higher prices, and there may be less chance of violence spreading from a civil war in Libya, Africa’s third-largest crude producer, the team said in an April 15 report. Higher energy costs and manufacturing disruptions caused by an earthquake in Japan on March 11 may mean less consumption of copper and platinum, the bank said. Goldman also advised clients to end a separate bullish bet on copper, which it had recommended in October, after prices rose 23 percent, and one on platinum, made in July 2009, after a 36 percent advance. Investors should still buy European gasoil, soybeans and gold, the bank said, reiterating advice in October and November. The New York-based bank recommends being “underweight” commodities in the next three to six months.

Total Return

The S&P GSCI Enhanced Total Return Index, Goldman’s benchmark for commodities, fell 1.1 percent since the note to clients on April 11. The team expects the gauge of 24 raw materials to rise 10 percent in 12 months, less than the 14 percent previously forecast. Copper has fallen 8.2 percent from the record $10,190 a metric ton reached Feb. 15, and cotton has slumped 28 percent from the all-time high of $2.197 a pound set March 7. At the same time, oil has advanced 22 percent this year, and gold futures reached a peak of $1,577.40 an ounce yesterday, heading for an 11th consecutive annual gain. Morgan Stanley, operator of the world’s largest brokerage, is still “very long” crude and corn, and favors wheat and gold, Allidina said in an April 29 telephone interview. Since Dec. 15, 2009, when the bank advised investors to buy the oil for delivery in December 2011 on the New York Mercantile Exchange, that contract has gained 38 percent. The firm is bearish on sugar, natural gas, cotton and coffee, he said.

‘Tight Inventories’

Betting on lower commodity prices, “broadly speaking, right now is not a good idea, because you do have tight inventories,” Allidina said. “You need to ration demand. You are not doing that at current prices.” Investors held a record $412 billion of raw-material assets by the end of March, almost 50 percent more than a year earlier, Barclays Capital estimates.

Net-long positions held by managed-money funds are within 4.8 percent of the record 1.56 million contracts reached in October, CFTC data show. Open interest in 17 of 19 commodities tracked by the Thomson Reuters/Jefferies CRB Index reached 8.2 million contracts, data from the CFTC show. That compares with an all-time high of 8.6 million on Feb. 18. The rally means record profit for BHP Billiton Ltd., the biggest mining company, and the second-highest earnings ever for Exxon Mobil Corp., the largest publicly traded oil producer, analysts’ estimates compiled by Bloomberg show. Nestle SA (NESN), the top food company, said in February that its commodity costs will rise as much as a record $3.4 billion this year. Gap Inc., the leading U.S. apparel chain, is contending with cotton prices that rose 92 percent last year.

Driven Into Poverty

The surge in commodities has wider implications. Global food prices tracked by the United Nations reached an all-time high in February. The World Bank says the increase contributed to 44 million people falling into poverty in the past year. Inflation is accelerating worldwide, spurring central banks from China to the euro region to increase interest rates, potentially curbing economic expansion. Rising oil prices could be “sowing the seeds of future demand destruction,” the Paris-based International Energy Agency said April 12. China, the world’s biggest copper user, imported 43 percent less metal in March than a year earlier, customs data show. Holdings in exchange-traded funds backed by gold fell 1.3 percent this year. “Commodities are in the process of peaking, and will come down in the next three to six months,” said James Paulsen, the chief investment strategist at Minneapolis-based Wells Capital Management, which oversees about $340 billion. The S&P GSCI index rose 27 percent since Paulsen predicted Dec. 1 that raw materials would continue to rally.

Copper May Rise

The most-accurate forecasters tracked by Bloomberg over the last eight quarters expect more records this year. Copper may rise 9.6 percent to $10,250 a ton within six months, according to Christin Tuxen, an analyst at Danske Bank A/S in Copenhagen. Gold will advance 14 percent to $1,750 an ounce, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich. Corn is likely to gain 11 percent to a record $8 a bushel, according to Commerzbank AG, last year’s most-accurate forecaster. Crude will rise 31 percent to $145 a barrel, near the record $147.27 set in July 2008, said Michael Pento, the senior economist at Euro Pacific Capital Inc. in New York who correctly predicted the collapse in commodity prices in 2008, the rebound in 2009 and last year’s rally in gold.

Weaker Dollar

Pento is bullish because he expects the dollar to weaken, making dollar-denominated commodities cheaper for those holding other currencies. The U.S. Dollar Index, a gauge against six major trading partners, fell 7.5 percent since the beginning of January, the worst start to a year since 1995. The Dollar Index has a negative correlation of 0.87 to the S&P GSCI Index. A figure of 1 would mean they move in lockstep. The dollar weakened as the Federal Reserve maintained record-low U.S. borrowing costs and began pumping $600 billion into the economy by buying Treasuries. The gauge may drop to the lowest since July 2008 by the end of the year, estimates compiled by Bloomberg show.

Fed Chairman Ben S. Bernanke signaled April 27 the Fed will maintain the record monetary stimulus when its bond purchase program ends in June. Demand for commodities may also be bolstered by investors hedging financial assets against inflation. The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March, the same month in which Chinese consumer prices rose by the most since 2008.

‘Alarming Rate’

Global demand for energy, metals and crops is outpacing supply “at an alarming rate,” spurring a “permanent shift” in the value of natural resources, said Jeremy Grantham, the chief investment strategist for Boston-based Grantham, Mayo, Van Otterloo & Co., which manages $107 billion in assets. “The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value,” Grantham, who correctly predicted the trough in U.S. equities in 2009, said in a report April 25. “We now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common.”


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