$300B INVESTMENT IN COMMODITIES
Citigroup finds credit crunch has not harmed base metals investment
Analysis published this week by Citigroup determined the credit crunch has not harmed the estimated $300 billion of speculative/investment money in commodity markets.
Author: Dorothy Kosich
Posted: Friday , 31 Aug 2007
RENO, NV -
Research published by Citigroup Global Markets this week determined that the current credit crunch has consolidated, rather than harmed, commodity investment.
Citigroup estimated that around $300 billion of speculative/investment money is in commodity markets, up from $200 billion in 2005. Of the $300 billion, Citigroup estimated that about $50 billion is invested in base metals.
While hedge funds account for 40% of total base metal investment and comprise $40 billion of the investment in commodities, it still represents only 3% of their investment portfolio, Citigroup analysts Alan Heap and Alex Tonks said, noting, however, "this is still a substantial sum in the context of the commodity markets."
The analysts found that specialist funds often hold physical metal as well as futures and derivatives.
Citigroup estimated that the level of investment in commodity indexes was roughly $160 billion, or more than half of the total and the fastest growing source, having doubled in two years. The analysts added that other estimates put the total at around $120 billion to $200 billion.
"The dramatic increase of fund flows into commodity index funds is being driving by:
"Moves to capture higher returns available from commodities, compared to other asset classes-many of the early investors in commodity indexes were European fixed interest funds.
"Moves to capture the portfolio diversification attributes which investing in commodity markets traditionally provides."
During this current credit crisis, Citigroup's research found that "investors have reduced their exposure to commodity markets by selling both long and short positions. However, the reduction in net investment is modest and well within the ranges of movements seen several times in the last three years, and much less than occurred in 2006 when the oil price fell sharply."
Heap and Tonks determined that speculators remain net long on commodities by about $30 billion. Meanwhile, speculative positions account for nearly half the market on Comex, up 25% over five years ago.
The analysts said they continue to believe that copper short "is being used to fund long-term positions in lead." They also noted that "copper net short has been closing over 2007 and remains marginally net short," with a -36% decline in long positions and -20% in short positions since late July.
In the meantime, Citigroup's analysis determined that, while speculative positions in gold are volatile, they have not been net short since April 2001. "Investor/speculator position remain overall net long gold, yet long position have fallen 23% and short position by 21% since July."
Heap and Tonks also noted that aluminum and zinc have been short selling since the beginning of August, while "lead has seen new buying since February followed by some long liquidation" since the end of July. "Nickel saw substantial short covering into the price rally from December 2006 to April 2007 followed by short selling since April," they said.
If the United States slips into recession, Citigroup predicts that "metal markets would probably be relatively unaffected" by two consecutives quarters of negative GDP growth.
The analysts found that some potentially positive implications may flow from the current credit crisis including:
Marginal new projects may find it difficult to get financing.
Weaker exchange rates in commodity-producing nations will reduce cost pressures.
Global demand remains robust.
Slower global growth would reduce the need for more severe economic tightening in China and the risk of recession. |
