›Battered Just Weeks Ago, Resources Shake Off Global Fears
FEBRUARY 1, 2012 By LIAM PLEVEN
Commodity prices are surging again, rebounding sharply from the steep declines late last year, as buyers gain confidence Europe's debt problems won't cascade out of control and destroy demand.
Copper, aluminum and other industrial metals that can serve as manufacturing barometers shot up by double digits in percentage terms in January, led by tin's 29% gain.
Precious metals also have climbed sharply, with gold up 11% and silver 19% in 2012. And prices for vital crops are rising, with corn up 10% and wheat 15% since mid-December.
The gains are a striking reversal from last year's fourth quarter, when commodity prices tanked along with other risky assets as concern mounted about Europe's troubles. At their December lows, copper and corn had both fallen 12% from their peaks for the quarter, oil had dropped 9%, and gold was down 14%. Tin had shed 19% of its value.
The about-face is paying off for investors who held onto commodities despite the prior drops[duh].
"Obviously, we felt a little pain toward the back end of last year, but it's come roaring back this year," said Carlton Neel, co-manager of the Virtus Alternatives Diversifier fund, a mutual fund with about $180 million in assets. Mr. Neel's economic outlook wasn't so gloomy, and the fund's allocation to commodities increased to 17.3% in October and November, above the 15% benchmark.
Amid the recent rally, Ric Deverell, global head of commodities research at Credit Suisse, dubbed 2012 the Year of the Rebound in a research note mid-month. "The fear of a really big macroeconomic event had not materialized," he said in an interview. "Prices had overshot."
To be sure, Europe and the rest of the world remain vulnerable to economy-rattling shocks that could curtail demand. Investors and traders also cut their bets on many commodities in 2011, and while wagers have started to rise this year, the number of outstanding contracts to buy or sell is in many cases still lower.
Energy commodities, moreover, have lagged behind during the recent rally, with natural gas dropping 7.7% Tuesday to put it down 16% this year, and U.S. oil prices down 0.4% in January, though up 5% from mid-December lows.
The Dow Jones-UBS Commodity Index, about a third of which is devoted to energy, is up 2.5% this year, after falling in 2011.
Commodities also are notoriously volatile, and some metals prices pulled back this week. While some goods that have gotten pricier are in tight supply, helping drive gains, others are relatively abundant, which could undercut rallies. Even some materials that have seen sharp increases recently remain far below 2011 highs, which included a number of records.
But for now, prices for many materials are benefiting as investors who entered the year bracing for the worst economic news weigh rosier outcomes.
Most of the recent gains came before the Federal Reserve's plan to keep interest rates low through 2014 became public last week, but that move could fuel the rally. Similar Fed moves in recent years have stirred buying interest in industrial building blocks.
"We definitely see an impact" from that announcement, said David Greely, chief commodities strategist at Goldman Sachs Group. It will particularly boost gold, which is often viewed as a hedge against the risk of inflation, but also encourage those who believe demand for oil, copper and other commodities will keep prices high, he said.
"It gives people more confidence in the economic recovery," Mr. Greely said.
Some investors are betting further gains lie ahead, believing the U.S. economy is gathering strength or that China and other fast-growing Asian economies will remain voracious consumers of the raw materials needed to build homes, cars, appliances and consumer electronics.
"We're still a big commodity bull," said Mark Iwamoto, president of Iwamoto, Kong Wealth Management Group, based in Irvine, Calif., which manages about $350 million for individual investors. Going into the fourth quarter of 2011, Mr. Iwamoto said the firm had about 5% to 6% of its assets in commodities, but it had increased that to 7% to 10% coming into 2012. Others are following suit, he added: "Investors are reinstating positions that they may have liquidated late last year."
Government figures bear that out. The number of open copper contracts is up 22% since the end of 2011, after declining 30% last year, according to data from the U.S. Commodity Futures Trading Commission. Open interest in gold, corn and cotton also declined last year but is up 6%, 8% and 11%, respectively, for those materials this year.
For those investors, fears appear to be receding that Europe's problems could lead to a wider crisis that cuts into the appetite for raw materials around the world. Late last year, Goldman Sachs described that risk as a "whirlpool," but now, Mr. Greely said, "the whirlpool seems to be at a greater distance."‹
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