Commodities Will Draw In Fresh Investors

llOIL AND metals markets are undergoing a correction that fund managers say can take some prices down by 10-20%, but the longterm uptrend seems intact and a fall is only likely to draw in more investors. Many of the investors who missed out on the commodities rally early this year are preparing to enter those markets for the first time or add to their holdings.The notable exception is grains and other agricultural products, where relatively illiquid markets, previously populated by consumers and producers, have made it difficult for funds and to invest large amounts. Overall, however, across the commodities complex, prices can fall by 10-20% over coming weeks and months as short-term players take profits or cut their losses.
    "In the last stages of an upswing, you get a lot of short-term investors and traders coming into the market, who don't care about fundamentals," said Ashok Shah, chief investment officer at London & Capital. "The underlying fundamentals will reassert themselves."
    One of the tenets underlying the bull run of the past few years has been demand growth from emerging countries such as China and India, with their growing middle classes and massive amounts of money allocated to infrastructure.
    Unless the US falls into deep recession, which will damage export-reliant economies, commodity demand from these countries is something investors cannot afford to ignore. That is a major reason why many institutions such as pension funds are still making new allocations to commodities and why new funds dedicated to the sector are still being launched. And in oil and copper — used in power and construction — there is the ever-present worry over supply, often triggered by disruptions, politics or stockpiling.
VIOLENT CORRECTIONS: Crude oil hit a record peak above $135 a barrel on May 22 and is now at around $128 a barrel, copper on the LME hit an all-time peak of $8,880 a tonne on April 17 and has since fallen about 10%. Part of the reason behind those falls has been the firmer dollar, which makes commodities priced in the US currency more expensive for holders of other currencies.After European Central Bank (ECB) president Jean-Claude Trichet said on Thursday that euro zone rates can rise as soon as July, the dollar sell-off boosted oil and gold prices. But if markets take to heart the change in tack at the US Federal Reserve whose chairman Ben Bernanke this week shone the spotlight on inflation, the dollar can stage a significant recovery and accelerate the retreat from commodities.
    "Markets don't go up in a straight lines," said Kevin Arenson, chief investment officer at Stenham Asset Management. "We can see violent corrections, but ultimately, we are still in a bull run that will last for another 5-10 years." The reduction of subsidies on commodities such as petrol in places like India can also hit crude sentiment as higher prices can erode demand in the short term. Spot gold, down about 15% from a peak above $1,030 an ounce touched briefly on March 17, is also likely to see a fall-out from a resurgent dollar as the precious metal has the strongest relationship with the dollar.
    reuters