As the global economy improves and the siege mentality in the financial markets turns into, at times, over-optimistic exuberance, other instruments in commodities are also receiving more interest. The growth of exchange traded commodities is slowing down but the overall trend of growth is continuing. Commodity investors are becoming increasingly sophisticated and while there is currently plenty of interest in beta type investments such as index funds, investors are expected to employ more alpha strategies—investments in spreads and swaps—this year. At the same time, because of a better understanding of commodities, there are fewer large arbitrage opportunities on the scale that has been seen in the past. By Vanya Dragomanovich
OILING THE WHEEL OF GROWTH
Commodities have performed exceedingly well in the past 12 months. Copper rose 130% on the year, while aluminium rallied ‘only’ 44%; the kind of return that would have had investors whooping with joy in a normal year. If the question is can commodities repeat this kind of performance next year, for most of them the answer is not to the same degree, but then neither will other assets that rallied on a comparable level in 2009, such as emerging market equities. If the question though is: are they likely to continue rising? The answer is definitely yes.
The biggest driver behind the recovery of commodities had less to do with genuine demand than with the easy availability of cash provided by central banks. The world economy, though improving, is far from being back in full growth mode, which is the pre-requisite for a fundamental improvement in demand for oils, metals and agricultural commodities.
A clear sign that demand is not back yet is the fact that exchange warehouses are full of metal and one in 12 of the world’s crude oil tankers are being used to store oil rather than move it from place to place. However, because the central banks have made money easily available, speculators can borrow short-term dollars at near-zero interest rates and buy assets that provide much higher returns.
This trend will change slowly. Central banks will start tightening the supply of money but they will be keen to do it in baby steps to avoid disrupting the markets. Here are the first signs: the New York Federal Reserve carried out a small reverse repurchase agreement transaction in early December to test how the market would respond to the.....
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