Rising volatility and huge trading volumes across commodity markets are luring big money risk takers, even if record price rallies are over for now. Last year began with a surge of investment from institutions that tend to lock in for the long haul.
The failure this January of pension funds, insurers and high net worth individuals to repeat that cash injection helped to panic speculators into a deep sell-off. But commodity markets have since rebounded and the prospect of continued price swings offers an opportunity for many.
"From an active standpoint, it makes a lot of sense when volatility comes back to take some positions ... Volatility presents opportunities," said Jeff Kleintop, chief investment strategist for US-based PNC Wealth Management, which manages assets worth $53 billion.
January figures on inflows to commodities are keenly awaited. So far there is little evidence the more conservative investors have abandoned the sector, but as the fashion grows for more adventurous strategies, the proportion of long-only money is expected to decline, which could accentuate volatility.
"Pension funds that have invested are probably not likely to disinvest, but the hotter money, like high net worth individuals might sell or reduce their positions. That could reduce the stabilising effect of long-only money," said Richard Cooper of Mercer consultancy.
For those taking active - or both long and short - positions, volatility, already regarded as a characteristic of commodity markets, is a good thing. "You can trade the range," said Mike Wittner of Calyon investment bank.
As a variety of players took up their various positions, open interest - or the number of contracts that have not been closed - on the 23 major US commodity futures markets grew by almost one million lots, or 10 percent, from the end of last year to the end of last week, Barclays Capital said.
That compared with an increase of 450,000 lots, or 6.6 percent, over the same period last year when the commodity markets were in a clear uptrend. The increase is spread over various markets, with corn, soybeans, crude oil, natural gas and sugar all seeing big rises.
After last year's record levels on crude, gold and many industrial metals, this year's hot tip is the agricultural complex, which is expected to draw support in part from demand for biofuels, as environmentally friendly alternatives to hydrocarbons.
The US corn market has struck a 10-year high and the Chicago Board of Trade said trading in its agricultural complex hit a new daily volume record last week. For investors, who traditionally have viewed commodities primarily as a way of diversifying a portfolio and price direction as secondary, the classic one-way bet was to take a long-only position through an index or basket of commodities - but that is losing its appeal.
Inflows into US commodity index-linked funds totalled $909 million in 2006, far below the 2005 total of $7 billion and the lowest annual figure since 2002, according to Barclays Capital.
But interest in other commodities instruments has grown. The notional value of newly issued commodity structures, governed by a manager who actively trades various markets, in the year to October 2006 was estimated to have grown to $8.6 billion, double the total for the whole of 2005.
Another fashionable route in is via exchange-traded funds (ETFs), which give investors exposure to commodities futures in the same way as they can buy into a company's equity. The amount of gold under management in ETFs rose by 66 percent to a total of 604 tonnes in 2006 - the equivalent of China's gold reserves.
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