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Precious metals continue to perform

Posted by vmsalama on May 27, 2008


by Vivian Salama

The National

DUBAI // Precious metals and “soft” commodities will continue to outperform this year as investors look to hedge against inflation through greater portfolio diversification, an industry expert has forecast.

Energy and grain should also perform well in the coming year, although not at last year’s levels, he suggests. 

“Since the commodities business has been very successful this year, more money is coming into the business,” said Victor Sperandeo, an author on commodities trading and the chief executive of Alpha Financial Technologies, as he addressed the 2008 Commodities Investment World conference.

“So what happens is as prices rise, more money comes into the business, because we [traders] start buying more.” Investors are celebrating this long awaited rally. Thanks to commodities, they are finally seeing significant gains in markets that in recent years have been dominated by the dotcom and housing sectors. Prices are up 20 per cent since the end of December, according to CRB, a leading industry index that tracks the prices of 19 commodities.

Experts suggest several factors have been contributing to the commodities rally, including traditionally higher spending during a US election year and the credit crunch, which as of late has served as a distraction to central bankers. The Beijing Olympics have also been stimulating higher commodity prices, said Mr Sperandeo.

“China is a huge buyer of commodities at this time,” he said, citing the country’s overwhelming consumption of everything from energy to industrial metals, cement and water. “This will continue until after the Olympics, then they may worry about the effects of inflation and other things.”

Gold and oil have continued to earn praises – from investors at least – for their performances in the past year. Crude oil sold at US$132.19 per barrel in New York on Friday, up 103 per cent from $64.97 a year earlier. Last Thursday, oil hit an all-time high of $135 per barrel on both sides of the Atlantic.

“I’m now saying that oil will hit $150 [this year],” said Mr Sperandeo. “It has a lot to do with supply and demand and what the US is doing to constantly restrict supply from coming on the market.”

While gold prices have slipped some 14 per cent since hitting a record high price of $1,030.80 an ounce on March 17, the precious metal is heading upwards and many investors believe it will inevitably surpass the $1,000 mark again this year. “Gold is just a reflection of inflation and world chaos,” said Mr Sperandeo. 

Mark Mathias, the chief executive of Dawnay Day Quantum, a UK-based investment firm, speculated on what he called the one fundamental difference between gold and oil.

“There are very big above-ground supplies of gold available in the [exchange-traded funds], exchange rate commodities and in central banks,” he said. “As an investor, the risk, if either of those parties starts selling, is there could be a big supply of gold in the market in a very short space of time.”

Far from being overly optimistic, investors warn that commodity rallies are cyclical, and what goes up must eventually come down. However, many believe that the market will continue to be bullish for as long as 10 years to come, particularly as capital shifts from the West to emerging markets in the Middle East and Asia.

The subsidising of infrastructure and economic development by emerging markets has led to a massive wave of global industrialisation. This massive scale of development will continue to fuel higher commodities prices as the demand for oil, as well as food, continues to grow.

“The money supply has increased 13 times from $800 billion [in 1971] to over $12 trillion two years ago,” said John Lee, the principal trader at Mau Capital Management. “Just from a money supply perspective, we still have a way to go to manage the amount of money that’s out there.”

However, Mr Mathias said that operational burdens on the commodity supply chain – whether they were shortages of delivery lorries, problems with mining equipment or poorly operated ports – plus a booming demand from countries in the Middle East and Asia, could be what was really driving prices up.

“Commodities require a shortage of supply, otherwise the price will not go up,” he said. “Every step of the way, the commodities supply chain is stretched, and there isn’t sufficient capacity to put through the degree of commodities being demanded.”



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