`Tidal Wave' in Commodities Rises to $400 Billion

`Tidal Wave' in Commodities Rises to $400 Billion

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Global investments in commodities rose by more than a fifth in the first quarter to $400 billion, helping boost prices as investors sought a buffer against inflation and a weaker dollar, Citigroup Inc. analysts said.

 

Investments in commodity indexes rose $40 billion in the first three months of the year to $185 billion, a larger gain than the whole of 2007, Citigroup analysts Alan Heap and Alex Tonks said today in a note to clients.

 

A ``tidal wave of investment flows into commodity markets has further boosted prices,'' the analysts said. ``The weakening U.S. dollar has been the main macro force attracting funds to commodity markets. Other contributors are falling real interest rates and inflation worries.''

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures rose to close at a record on March 5. The gauge climbed 22 percent last year for a sixth consecutive annual increase and has advanced 17 percent this year, while the Standard & Poor's 500 Index gained 3.5 percent in 2007 and has fallen 6.5 percent this year. Most-active crude oil, gold, platinum, wheat, corn and soybean futures are among those that set records this year.

 

After investments in indexes, commodity trading advisers account for the biggest portion of the total amount invested, the Citigroup analysts said. At the end of the first quarter, advisers accounted for $94 billion, 18 percent more than at the end of last year, the analysts said.

 

$70 Billion Inflow

Hedge funds ranked third, with $75 billion in commodity holdings, an increase of 25 percent over the end of 2007, Heap and Tonks said. In all, they estimate $70 billion in additional investment funds flowed into commodities markets in the first quarter.

Exchange-traded funds, or ETFs, accounted for $46 billion in commodity investments as of March 31, up 31 percent from $35 billion at the end of 2007, the analysts said. ETFs track equity, bond and commodity indexes and are often cheaper and easier to trade than similar mutual funds.

 

The ``tidal wave'' of the past quarter is showing ``signs it is already ebbing,'' Heap and Tonks wrote. ``We don't think it is sustainable.''

The credit crisis that began last year has made it ``harder to get finance to build new supply capacity and to build new infrastructure,'' cooling demand, Heap and Tonks said. The effects of the credit crisis on equities markets accelerated the flow of investment funds into commodities, which they said also may prove temporary.

 

``There was no conviction regarding financial assets,'' Jim Vail, who manages $1.5 billion in natural-resource funds at ING Investment Management Co. in New York, said today in a telephone interview.

 

`Seasonal Top'

``It was a seasonal top in commodity prices,'' Vail said. ``There's going to be some pullback, and I look at that as an opportunity.''

``In this type of environment, where supply constraints are repeating themselves, it's going to keep prices higher,'' he said. ``Capital costs are also higher. As the marginal cost of production continues to increase, it tells you where prices are going.''

 

Long-term fundamentals of rising demand and constrained production, which have stimulated investment in recent years, remain intact, yet some investors have started cutting their bets on rising raw-materials prices since the end of the quarter, Heap and Tonks said.

The dollar's decline, while providing a short-term boost to prices from investors seeking a store of value, may not last if the weaker U.S. currency fails to stimulate economic activity to increase consumption of raw materials, Heap and Tonks said. A falling dollar's effect on futures also may fade if it depresses prices in producer currencies, eroding profits, they said.

 

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