Wednesday, May 12, 2010

>COMMODITY FUND FLOWS: New Products Could Boost Base Metal Investments

Commodity Investments Rebound — We estimate commodity investments at around USD250bn, back to the highs of mid 2009. During the global financial crisis the value of investments halved, but due more to collapsing commodity prices than fund outflows. Latest data show a reduction in net investments, reflecting a broad reduction in risk appetite driven by macro concerns in Europe and China. Notably, gold holdings have been least affected. We expect this to be a temporary pullback.

Significant Relative to the Physical Markets — Commodity investments equate to 10-20% of the value of annual physical demand, but only 1% of futures turnover1.

Index Investments — Account for 60% of the total, and more than half of the growth.

ETFs — Gold dominates physically backed ETFs. However, the launch of a base metal (aluminium) ETF could be an important source of further investment demand growth. The main hurdles are financing and warehousing costs.

Investment Drivers — The main drivers of investments in commodities are: the super cycle theory, portfolio diversification and commodities as a USD hedge.

Investment Impacts — Increased investment has introduced more anticipation into commodity markets. In addition reduced producer hedge selling and increased investment buying has tightened forward markets. In spot markets the results are an upward shift in traditional inventory:price relationship. The most important impact is higher prices.

The Future — We believe investments will be an increasingly important component in commodity markets, at least for the duration of the super cycle. There will be an increasing trend to more active investment strategies.

To read the full report: COMMODITY FUND FLOWS