Investors disillusioned by sluggish US stocks and bonds look set this year to boost their exposure to commodities even more than they did in 2007, when money in the sector swelled by about 20 percent.
"Broker projections for 2008 are that we will see a growth of about 30 percent in commodity-linked investments," said David Buckart, senior portfolio manager in New York for Barclays Global Investors.
But with energy, metals and grains markets hunting newer highs after trouncing stocks and bonds in 2007, this year's ride could get rocky. "People forget that when these markets don't perform, the volatility is a monster," said Brad Cole at Cole Partners, a Chicago hedge fund with $120 million in commodities.
Almost all commodities from oil to gold tumbled on Monday after setting record highs last week. In agricultural commodities, US grain traders were bracing for increased volatility in wheat, corn and soybean futures as investment funds begin rebalancing their portfolios for 2008.
Analysts at leading investment banks had estimated there was between $125 billion and $130 billion invested directly and indirectly in futures contracts of commodities like crude oil, gold, copper and soybeans at the end of last year - up from about $100-$105 billion at the close of 2006.
Barclays Global, a leading provider of commodities investment vehicles such as exchange-traded funds, saw assets under its management swell to about $10 billion in 2007 from under $4 billion in 2006. "For this year, I'll put a growth of least $1 billion and that's being conservative," Buckart said. Some of the new money coming into commodities could be leaving equities as part of an asset rotation.
"I think right now commodities, especially oil and precious metals, are seeing not so much an inflation play as a safe haven play in the midst of disappointing equity markets," said Ernie Ankrim, chief investment strategist at Washington's Russell Investment Group.
Five leading commodity indexes, which give pension funds and other big wealth manager passive access to commodities, returned 29 percent on average for 2007. Leading US stocks index S&P 500 .SPX> returned about 4 percent for last year while the Lehman Aggregate, which tracks US bonds, returned around 6 percent.
Many in the market fear that there may not be enough supply to feed burgeoning demand for commodities. Such concern was partly responsible for last year's big price gains for oil, gold and most other commodities. The current year may be even more bullish, with geopolitical tensions straining already tight inventories.
"Talking to oil and gas companies, it's harder and more expensive to find large, new reservoirs of oil and gas," said Will Danoff, manager of the $81 billion Contrafund at Boston's Fidelity Investments. "You can make that case for gold and copper, and the rest." But a few analysts also caution against expecting too much from commodities if the slowdown in the US economy affects Europe as well and halts the decline of the dollar against the euro, which contributed partly to last year's rally.
"I think the dollar is more than inexpensive...it's ridiculously cheap," said Donald Gimbald, senior managing director at New York's Carret Asset Management. "Europe's economic scenario could be worse than ours. If that's right, one has to believe that the speculation in agricultural products, not to mention gold and others, is excessive."
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