Bloomberg News

Hedge Funds Add to Wagers in Biggest Rally of 2011: Commodities

October 17, 2011

(For more commodity columns, click CMMKT.)

Oct. 17 (Bloomberg) -- Speculators boosted their wagers on higher commodity prices for the first time in five weeks as increasing confidence that the global economy will avoid another recession spurred the biggest rally of the year.

Money managers boosted combined net-long positions across 18 U.S. futures and options by 0.2 percent to 656,691 contracts in the week ended Oct. 11, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Index of 24 commodities rose 5.2 percent last week, the most since December and enough to take the gauge out of the bear market it entered last month. Hedge funds had cut their bets by 49 percent in the previous four weeks.

The surge in prices mirrored the advance in global equities, while Treasuries declined for a third consecutive week, on mounting investor confidence. Leaders from the biggest economies began talks to tame Europe’s debt crisis and Slovakia provided the needed approval to enhance a euro region bailout fund. U.S. retail sales rose the most in seven months.

“We’re not having the same kind of recession as 2008, so we’re not going to have the same kind of drop in commodity prices,” said Brett Hammond, a senior economist with TIAA-CREF, a New York-based investment manager with $469 billion in pensions and other assets. “Some of the air has come out of the bubble, but overall, I think there’s a lot more room for commodities to run.”

Crude Oil Jumps

Twenty one of 24 futures tracked by the S&P GSCI rose last week, led by an 11 percent gain for sugar and the biggest soybean rally since 1999. Crude oil jumped to a three-week high, and cattle futures rallied to a record for the second time this month. Cotton, nickel and aluminum fell.

The MSCI All-Country World Index of equities rose 5.4 percent last week, the most since July, paring its decline from this year’s peak in May to 16 percent. Treasuries lost 0.62 percent, Bank of America Corp. indexes show. The dollar weakened 2.7 percent against a basket of six major currencies, including the euro, boosting the appeal of dollar-denominated commodities.

Group of 20 and International Monetary Fund officials said Oct. 14 the IMF may bolster its lending resources to help stem Europe’s debt crisis. Euro-zone leaders may complete a debt plan at an Oct. 23 summit to present to a gathering of G-20 chiefs on Nov. 3-4.

Retail sales rose 1.1 percent in September, the most in seven months, the U.S. Commerce Department said Oct. 14, adding to evidence that the world’s largest economy will avoid a recession. A week earlier, the Labor Department reported the jobless rate held at 9.1 percent.

Positive Surprises

The Citigroup Economic Surprise Index for the U.S., a measure of deviations from the median estimates of economists surveyed by Bloomberg, turned positive on Oct. 14 for the first time since April 29. That indicates that reports on balance have been better than expected.

The most bullish advances in speculators’ positions last week were in energy, with a 39 percent gain in heating oil, a 23 percent increase in gasoline and a 7.8 percent advance in crude oil, CFTC data show. Funds also boosted bullish bets in gold by 3.4 percent and those in silver by 1.3 percent.

Oil futures rose 4.6 percent to $86.80 a barrel in New York last week, taking the two-week advance to 9.6 percent. The contract dropped 0.8 percent to $86.13 at 10:51 a.m. New York time today. While the International Energy Agency cut its forecast for global crude demand in 2012 for a second month last week, the Paris-based adviser to 28 nations is still anticipating record consumption.

Bullish Bets

Speculators reduced bullish bets for crops including corn, soybeans and coffee, even as prices appreciated. Soybeans rose 9.6 percent last week to $12.70 a bushel on the Chicago Board of Trade after the U.S. Department of Agriculture reported that China bought U.S. corn, soybeans and wheat. The Asian nation is the world’s largest soybean importer.

Bearish bets on copper rose 80 percent from a week earlier, leaving investors with a net-short position of 9,489 contracts, the most since June 2009. Copper futures advanced for a second straight week, gaining 4.1 percent. The most-active contract gained 0.3 percent to $3.418 a pound today.

“With the lack of potential economic growth in Asia, it’s very, very hard for copper prices to go up,” said David Stroud, chief executive officer of TS Capital Partners, a New York-based hedge fund.

Inflation in China, the world’s biggest copper consumer, slowed to 6.1 percent in September, the lowest since May, the Beijing-based National Bureau of Statistics said Oct. 14. China’s economic growth may decline to 8.7 percent next year, from 9.3 percent in 2011, according to the median of nine economists’ estimates compiled by Bloomberg.

Free-Trade Agreements

The U.S. Congress on Oct. 12 approved free-trade agreements with South Korea, Colombia and Panama, bringing an end to years of stalemate by lawmakers and offering what supporters said was the biggest opportunity for exporters in decades.

The Denver-based U.S. Meat Export Federation expects beef shipments to climb by about $517 million, or 13 percent, over the next 15 years as duties on U.S. shipments are phased out. Cattle futures on the Chicago Mercantile Exchange reached $1.243 a pound on Oct. 14, the highest ever for a most-active contract. Hog futures jumped to a two-month high of 90.725 a pound on Oct. 14 and gained for a fourth consecutive week.

Investors pulled $275 million from commodity funds in the week ended Oct. 12, the least in three weeks, according to Cambridge, Massachusetts-based EPFR Global. Funds focusing on gold and precious metals got an extra $72 million, EPFR said.

‘Burst of Optimism’

The outflow was “a fairly small one, which sort of suggests a slowing down while people wait to see if this latest burst of optimism has any legs,” said Cameron Brandt, the director of research at EPFR.

The S&P GSCI is up 7.7 percent since the end of September and headed for its biggest monthly rally since December. Last week’s advance extended a rebound that began Oct. 5 after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank may take further steps to shore up the recovery.

Twenty-two of 25 people surveyed by Bloomberg last week said they expected gold to rise this week, the highest proportion since mid-July. Traders also anticipate gains in copper, sugar, corn and soybeans, separate surveys show.

Gold futures climbed 2.9 percent last week to $1,683 an ounce in New York, the biggest weekly increase since a rally that drove prices to a record $1,923.70 in early September. The Federal Reserve said in meeting minutes released Oct. 12 that some officials last month wanted to keep further asset purchases an option to boost the economy.

“Gold will respond the quickest to an expansion in money supply,” said Michael Pento, the president of Pento Portfolio Strategies in Holmdel, New Jersey, who correctly predicted the collapse in commodities in 2008. “Gold is going to tread water for a while, but the next major move is going to be higher.”

--With assistance from Chanyaporn Chanjaroen in Singapore. Editors: Steve Stroth, Stuart Wallace

To contact the reporter on this story: Whitney McFerron in Chicago at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net


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