The week-long sell-off in commodities has erased many millions of dollars in recent profits, but investors who had warmed to the asset class will not park their money forever in bland bonds or money market funds.
Another round of gains awaits investors who buy leading raw materials from oil to copper, gold, silver and sugar, analysts said. They noted that these commodities found new support levels on Monday from last week's speculative shakeout. "Most funds need to be in a long-term of say 12 months of extended flat or negative performance to have some kind of impact on their portfolio, which could prompt them to abandon an asset class." said Rian Akey of Cole Partners, a Chicago-based consultancy that markets alternative investment managers to investors.
"Right now, the same sellers who exited will be looking for buying opportunities," he said. "I see oil at mid 60 (dollar) levels as a buy as your risk is on the upside, not downside. You can get some exposure and you're lucky, it can spike to 80 (dollars). Even if it's not sustainable at that level, you can trade in and out tactically."
US light crude has fallen below $70 a barrel from a record high of above $75 in April, while July copper on the New York Mercantile Exchange's COMEX division is trading under $3.50 a lb from a peak of $4.04 earlier this month.
Gold and silver remain near four-week lows and sugar is about 13 percent below the historic highs of February. The losses have sparked fears among some that there could be a permanent capital flight from commodities. But Akey dismissed that notion, saying it would take more than a few weeks of price lows for funds to change strategy.
While some hedge funds chasing absolute returns may be exiting commodities, institutions that invest passively in commodity indexes will stay, Akey said. "If you look at the institutions, they have only about 3 to 5 percent for commodities in a portfolio. These guys are not profit-takers. It's going to take a long and sustained move to get them out."
Edward Meir at New York's Man Financial said profit-taking seemed to be the only real explanation for the selloff. "If that's the reason, those funds are going to come back in. If the guy is sitting on 50 percent cash and he sees copper at 30 percent lower than it was before, he's going to buy it," Meir said. "The next big buying wave could happen anytime.
Meir said his study suggests that London Metal Exchange's three-month copper, hovering at around $7,500 a tonne, should be around $3,500 and $4,000 - almost half its current level.
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