Goldman, Deutsche Bank Say Double Down After Commodities Loss
By Saijel Kishan and Tan Hwee Ann
Jan. 22 (Bloomberg) -- Anyone who followed the advice of Goldman Sachs Group Inc. last year and invested $10 million in the Goldman Sachs Commodity Index would have lost 15 percent, or $1.5 million.
Like so many of Wall Street's best and brightest, Goldman, the biggest securities firm by market value, says it wasn't wrong, just early, and to expect an 8.1 percent return from the commodity index in 2007.
``The long-term secular story is very much intact,'' Jeff Currie, global head of commodities research at New York-based Goldman, told customers in London earlier this month. That's the same outlook provided 13 months ago by Arun Assumall, the firm's London-based head of commodities sales.
Like Goldman, Deutsche Bank AG isn't discouraging anyone from doubling down in what increasingly looks like a bear market. Germany's largest bank in September said oil prices will trade between $60 and $70 a barrel this year, well above the $49.90 oil fetched last week. Barclays Capital Inc., the securities unit of the U.K.'s No. 3 bank, said four months ago crude won't drop below $60.
As losses mount in copper, oil and sugar, these firms say the 20 percent plunge in commodities, as measured by the Reuters/Jefferies CRB Index, since May offers a chance to buy before demand from China and India causes a rebound. History shows otherwise. The CRB index dropped at least 20 percent six times since 1970, and on average, fell another 7.7 percent before bottoming.
`Further to Fall'
``Over the course of this year, many investors who went into commodities will question why they did so and whether they strategically want to be in it for the long term,'' said Simon Hayley, a senior economist at London-based Capital Economics Ltd., who said in May that prices would slump. Raw materials still ``have further to fall,'' he said.
Stocks and bonds in 2006 offered better returns than commodities for the first time in three years. The decline in energy prices led to a record $6.6 billion loss from natural gas trading at Amaranth Advisors LLC and a 19 percent drop at the $1.3 billion Oppenheimer Commodity Strategy Total Return Fund.
The CRB index, which reached a record high of 365 in May, fell 0.14 last week to 290.48 Friday, its lowest weekly close in almost two years.
Goldman, which generated about $2.5 billion from trading commodities last year, according to estimates from London-based Coalition Development, and Deutsche Bank say the prospect of falling U.S. interest rates and rising demand in China signal a recovery. China's oil use will increase 5.4 percent this year, according to the International Energy Agency in Paris. Copper demand will rise 5.8 percent, Deutsche Bank estimates.
Story Intact
For Michael Lewis, London-based head of commodities research at Deutsche Bank, prices are undergoing a ``recurrent correction in a continuing bull run.'' Nickel, zinc, gold and grains may rise this year, Lewis's team wrote Jan. 12.
Frederic Lasserre, the head of commodities research at Paris-based Societe Generale, France's third-largest bank, said in May that prices would drop in the fourth quarter of 2006 or the first quarter of 2007.
``It's best to wait,'' Lasserre said last week. ``Some investors who are still attracted to commodities are postponing their decisions. If we see prices fall further, then investors may start pouring in again.'' He expects markets to bottom at the end of this quarter, when the CRB index reaches 260.
SocGen vs Fimat
SocGen's own futures brokerage division, Fimat USA LLC, disagrees. Investors may add $25 billion this year to the $110 billion already in commodity markets, according to the New York securities and commodities broker. Only $5 billion was invested in commodity indexes in 2000, Morgan Stanley estimated.
New investors may include the California Public Employees' Retirement System, the biggest U.S. pension fund, which plans to invest in commodities for the first time, devoting $500 million. Universities Superannuation Scheme Ltd. of Liverpool, the U.K.'s second-largest pension fund, with $52 billion, may invest too.
``We feel the commodity markets are still underinvested,'' said David Burkart, a money manager at Barclays Global Investors in San Francisco. ``We expect higher prices in the long run.''
Barclays, which had the highest oil forecast among firms surveyed by Bloomberg, last week cut its projection by 13 percent to $66.30 a barrel because of warm weather.
``The warm weather has acted as a catalyst for some heavy selling of crude and made it hard to hold on'' for higher prices, said Kevin Norrish, an analyst at Barclays Capital, in a phone interview from London. ``It doesn't undermine what are still very constructive fundamentals, but it has an impact on sentiment.''
`No Let Up' in Hiring
Securities firms are hiring for commodities as fast as ever, said Paul Chrispin, co-head of energy and commodities at Principal Search Ltd., a recruitment firm with offices in London and New York. His firm last year placed a record of about 70 commodity traders, more than double the number in 2005.
``There's absolutely no let up'' in demand for traders, Chrispin said. ``As with 2006, a handful of the top traders at the top banks will still be likely to make $10 million or more in bonuses this year.''
Jim Rogers, the author of ``Hot Commodities'' who predicted the start of the rally in 1999, said the slide in oil is a ``correction'' before prices head above $100 a barrel. Crude ended last week at $51.99.
Rogers Still Bullish
``I'm just not smart enough to know how far down it will go and how long it will stay, but I do know that within the context of the bull market, oil will go over $100,'' Rogers said in a Jan. 17 interview in Tokyo. ``It will go over $150. Whether that is in 2009 or 2013, I don't have a clue.''
Emerging-markets investors, the group most at risk when commodities sink, are optimistic. The iShares MSCI Emerging Markets Index has gained 26 percent since mid-July while the CRB index fell. The indexes had tracked each other for the three years that ended in July.
``A lot of these countries are sitting on huge surpluses generated by their commodities exports, and they will probably continue to see quite strong domestic demand led by consumption and investment,'' said Devan Kaloo, fund manager and head of global emerging markets in London at Aberdeen Asset Management Ltd., which has $27 billion earmarked for emerging market investment.
Faber Says Sell
To Marc Faber, who predicted the U.S. stock market crash in 1987, the rise in emerging markets is a sign of excesses worldwide. Global assets are poised for a ``severe correction'' and it's time to sell stocks, bonds and commodities, he said Jan. 8 in New York.
The U.S. Treasury Department reported last week that OPEC nations sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities in the three months ended in November. The Organization of Petroleum Exporting Countries last sold Treasuries for three straight months in the period ending in June 2003.
A tumble in commodities may be the catalyst for a drop in financial assets, said Tony Crescenzi, chief bond-market strategist at Miller Tabak & Co. in New York.
``If commodity prices continue to fall, there is the potential for fallout in financial markets worldwide,'' he said. ``It would probably feed on itself, with many investors seeking to exit the same door.''
Citigroup Global Markets, analyzing charts that some traders use to predict price direction, said in a report Jan. 8 that ``commodity markets, while still considered in a bull run, are now overheated and vulnerable to significant corrections.''
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