Commodity prices are likely to fall further in the next month or two before rebounding towards the end of the year as demand continues to grow, prompting MF Global to expand its presence in the sector, a senior company executive said.
Brokerage MF Global Holdings, with a market value of $1.4 billion, maintained its long-term bullish outlook for the commodities and expected prices to rise 10-20 percent over the next 12 months from current levels due to a weaker dollar and rising global demand and gradual inventory tightening.
"We will see some weakness between now and the end of summer and then I think we are going to see a steady move up," MF Global's Head of Commodities Fred Demler told Reuters on Wednesday. "I feel commodities are overpriced by 5 to 10 percent right now, but a year from now they will be 10 to 20 percent higher than they are now." Higher commodity prices may lead to a slowdown in consumption, Demler said, and ruled out that demand destruction will take place.
The 19-commodity Reuters-Jefferies CRB index has tumbled 9 percent since April 29 when hedge funds and other large financial investors began cutting their exposure to commodities. Gold prices are down nearly 5 percent since April 29, with investor sentiment towards the precious metal turning more cautious as holders worry it may struggle to rise significantly after hitting record highs this month.
Gold rose for a tenth consecutive quarter in the three months to March, hitting record highs above $1,400 an ounce, buoyed by political turmoil in the Middle East and North Africa and lingering worries about indebted European countries. Crude oil had its deepest plunge during the course of a day on May 5. At one point, prices were off by nearly $13 a barrel, dipping below $110 a barrel for the first time since March. Oil's descent followed the biggest one-day price drop in silver since 1980 on Wednesday. US crude has slid about 15 percent since the start of May, silver 28 percent and copper about 5 percent.
"We are in a period of consolidation right now," Demler said. "But this commodities cycle is a long-term cycle." Commodities will likely start its steady recovery later this year as global inflation weakens the dollar, inventories tighten on rising industrial production, and economic expansion boosts consumer demand, he said. While the dollar had one of its strongest weeks last week, pushing the euro to its lowest since late March on Monday, the strength is seen short-lived by many and the greenback has still lost about 6 percent against the euro this year, according to analysts. "In the longer term, we are going to see a weaker dollar, partly driven by inflation and that will be a longer-term positive for commodity prices," Demler said.