28 December 2009
The year 2009 saw investors flocking to commodities as other forms of alternative investments - real estate in particular faced one of the worst years ever.
Gold rose to historic highs this year, outpacing the most affirmative of predictions. The metal has gained 25 per cent this year, touching a record $1,227.5 an ounce earlier this month. Gold rose the most in a week on December 24 as a drop in the dollar spurred demand for precious metals as alternative assets.
Oil, the most battered commodity in the last quarter of 2008, increased this year to comfortable levels so much so that the Organisation of Petroleum Exporting Countries (Opec) decided not to alter the production quotas almost every time it met this year.
Oil has now crossed the price tag of $75 a barrel and rested on $77.75 a barrel on Friday having risen 1.41 per cent from the previous day's close.
Interestingly, the price of almost every commodity rose this year even as inflation was under control almost the world over.
Besides precious metals and oil, the prices of base metals and edibles such as coffee, tea, sugar and rice all rose for a variety of reasons ranging from some political decisions to a draught. Tea prices are expected to fall next year as tea estate owners plan to produce more due to prevailing high prices.
Dubai-based analysts said the last week of 2009 may look lackluster for commodities but then sentiments will strengthen in the first month of 2010.
"It's the holiday season on globally now. So trading is slow. However, we expect it to pick up early next year," said Anoop PS, Assistant Vice-President at Dubai- based JRG International DMCC. At the Dubai Gold and Commodities Exchange (DGCX), the volume of gold traded on a daily basis dropped considerably after having been driven to record highs in November.
Exchange Tradeed Funds (ETFs) were the greatest benefactors of an increasing confidence in commodities.
In Europe alone, the basic resources ETFs comprising primarily of commodities attracted $393.3 million worth of investments this year, said Deborah Fuhr, Managing Director and global head of ETF research and implementation strategy at Blackrock.
Oil and gas ETFs attracted $274.6m worth of investments this year, Fuhr said.
"Inflows to ETFs have broad relevance to the pattern of fund allocations. ETFs have been and will be used as a means of trading short-term beta," Fuhr wrote in one of her closing reports for 2009.
"Although, today given the annual total expense ratios have come down on average to 37bps for equity ETFs, they are embraced as a tool for core holdings, strategic holdings, tactical asset allocation and building blocks in fund of funds and multi-asset classes strategies.
"An increasing number of institutional investors have embraced the use of passively managed ETFs over the past year as an alternative to using certificates and swaps as they to avoid products which have counterparty or issuer risk.
"Other investors have turned to ETFs after deciding to limit or refrain from using derivatives including futures. A growing number of investors understand that ETF liquidity is really the liquidity of underlying basket of stocks given the unique creation and redemption process that ETFs utilise."
Overall, 2009 has been a good year for commodities and for ETFs.
Surprising as it may seem, many index investments in 2009 got lower returns than the commodities they hoped to track.
Futures markets that love to spring up surprises have spurred commodity investors to look for more active management of commodities.
The trend is different from equities, where investors are opting for index funds.
According to a recent survey of Barclays Capital, most investors planned to increase exposure to commodities.
Interest in index investments has however slackened, the bank said.
An explanation of this behaviour may come from the following. The spot price of the Standard & Poor's GSCI, which measures just the price appreciation of the underlying commodities, has gained 43 per cent this year. However, people who bought products that follow the index have seen returns of only eight per cent.
Similar problems have impacted other commodity products.
The $2.5bn US Oil ETF has risen 10 per cent in 2009. Their returns were much behind US crude futures' that gave 67 per cent returns.
Apparently, the reason for this is that, unlike stock index funds, commodity funds are hinged on futures contracts that terminate after a set period.
The contracts have to be renewed after they expire. With higher forward prices in many commodity markets, returns get reduced, even in a prospective market.
Most traded commodities
Following are the most traded commodities as of now this year.
Base metals
Even though it were gold and oil that hogged media limelight in 2009, base metals have performed reasonably well. Base metals prices have risen recently but analysts warn that it may not be because of basic demand.
Edward Meir, a senior commodities analyst with MF Global, had a note of caution despite the robust gains seen over the past week. "We would advise against joining the long side, as we continue to believe the recent gains are not justified based on the prevailing fundamentals. Granted, the technicals do look more compelling, but we still would be very cautious here," he said.
He linked the demand for base metals with the Chinese economic data.
Copper
Copper is at $6,939 (Dh25,490) a tonne, up $58. The complex has seen choppy trading for the past few days with no clear pattern emerging. Meir said the metal will find a support at $6750 an ounce and a resistance at $7,170. "Copper prices closed lower shrugging off Chinese import data and relatively constructive existing sales data out of the US. In the latter regard, November existing home sales rose by 7.2 per cent, their biggest advance since February 2007, but the enthusiasm may have been tempered somewhat by the fact that expiring tax credits may have artificially boosted the numbers," Meir said.
"Other macro numbers we saw disappointed somewhat; Q3 GDP was revised to 2.2 per cent from an earlier reading of 2.8 per cent, suggesting that growth projections for Q4 may get scaled down a bit," he added.
Aluminium
Aluminium is currently at $2,256, up $14. It is expected to find a resistance at $2,350 an ounce, according to Meir.
"We are seeing a pennant formation starting to take shape on the charts, an impending technical indication that we could stage another push higher," Meir wrote in his report.
Aluminium may find support from the fact that Venezuelan producers have recently been forced to cut production. That the Chinese producers have agreed to pay more for imported Alumina may also support the prices, Meir said.
"Chinese aluminium smelters have agreed to pay more for imported alumina in 2010, a move that could reduce margins going foward, but which the smelters have apparently done in order to secure units. Term prices for imported alumina will rise to 14.5 per cent to 15 per cent of the price of aluminium on the LME," Meir said.
Zinc
Zinc is at $2,476 a tonne, up $42, and prices are at fresh 2009 highs. "We may be on our way to two consecutive closes above $2,441, in which case a breakout will be in place," Meir noted. In case the metal's price falls, it will find support at $2,260 an ounce, he added.
Lead
Lead is currently trading at $2,324 a tonne. It is expected to rise, Meir noted pointing out that the next resistance it faces will be $2,480 a tonne. If lead falls, it is expected to find support at $2,230.
Nickel
Nickel is trading at $18,130 a tonne up $380. "We got two daily closes above $17,500, and are now in store for further gains given the technical breakout evident on the charts. Next resistance is at $18,700," Meir noted.
Tin
Tin is at $15,900, up $75, but prices are still having trouble closing above $15,900 resistance for two days. "If they do, tin could be on its way to a breakout," he said.
Gold
Gold recently rose above the psychological $1,100 an ounce mark on the back of a weakening dollar. Interestingly, it is now hovering around its long talked about year-end forecast. It had gone much beyond - $1,206 an ounce throwing all the previous predictions into a wide disarray.
Recently the bullion kept extending its losses as the dollar posted further gains after US housing data supported recovery signs. "We are firmly in holiday mode with thin trading volumes likely to result in erratic price movement through to the year end," Jeffrey Rhodes, CEO of INTL Commodities DMCC, wrote in his recent report.
Silver
Silver recently recovered from a dip to the 100 day moving average pegged at $16.75 an ounce to end the day just 2 cents lower at $16.98 with physical demand from India evident at these lower levels, which are some 12 percent below the year's high of $19.40 posted at the start of December, Rhodes said.
"The near-term direction will be [as ever] driven by movements in the gold price with the key chart point to watch on the downside the 100 day moving average. A clear break and close below this level would have chart watchers looking for further weakness to $16, although as with gold price prediction at this time of year is an even less exact science than usual," he said.
The year 2009 saw investors flocking to commodities as other forms of alternative investments - real estate in particular faced one of the worst years ever.
Gold rose to historic highs this year, outpacing the most affirmative of predictions. The metal has gained 25 per cent this year, touching a record $1,227.5 an ounce earlier this month. Gold rose the most in a week on December 24 as a drop in the dollar spurred demand for precious metals as alternative assets.
Oil, the most battered commodity in the last quarter of 2008, increased this year to comfortable levels so much so that the Organisation of Petroleum Exporting Countries (Opec) decided not to alter the production quotas almost every time it met this year.
Oil has now crossed the price tag of $75 a barrel and rested on $77.75 a barrel on Friday having risen 1.41 per cent from the previous day's close.
Interestingly, the price of almost every commodity rose this year even as inflation was under control almost the world over.
Besides precious metals and oil, the prices of base metals and edibles such as coffee, tea, sugar and rice all rose for a variety of reasons ranging from some political decisions to a draught. Tea prices are expected to fall next year as tea estate owners plan to produce more due to prevailing high prices.
Dubai-based analysts said the last week of 2009 may look lackluster for commodities but then sentiments will strengthen in the first month of 2010.
"It's the holiday season on globally now. So trading is slow. However, we expect it to pick up early next year," said Anoop PS, Assistant Vice-President at Dubai- based JRG International DMCC. At the Dubai Gold and Commodities Exchange (DGCX), the volume of gold traded on a daily basis dropped considerably after having been driven to record highs in November.
Exchange Tradeed Funds (ETFs) were the greatest benefactors of an increasing confidence in commodities.
In Europe alone, the basic resources ETFs comprising primarily of commodities attracted $393.3 million worth of investments this year, said Deborah Fuhr, Managing Director and global head of ETF research and implementation strategy at Blackrock.
Oil and gas ETFs attracted $274.6m worth of investments this year, Fuhr said.
"Inflows to ETFs have broad relevance to the pattern of fund allocations. ETFs have been and will be used as a means of trading short-term beta," Fuhr wrote in one of her closing reports for 2009.
"Although, today given the annual total expense ratios have come down on average to 37bps for equity ETFs, they are embraced as a tool for core holdings, strategic holdings, tactical asset allocation and building blocks in fund of funds and multi-asset classes strategies.
"An increasing number of institutional investors have embraced the use of passively managed ETFs over the past year as an alternative to using certificates and swaps as they to avoid products which have counterparty or issuer risk.
"Other investors have turned to ETFs after deciding to limit or refrain from using derivatives including futures. A growing number of investors understand that ETF liquidity is really the liquidity of underlying basket of stocks given the unique creation and redemption process that ETFs utilise."
Overall, 2009 has been a good year for commodities and for ETFs.
Surprising as it may seem, many index investments in 2009 got lower returns than the commodities they hoped to track.
Futures markets that love to spring up surprises have spurred commodity investors to look for more active management of commodities.
The trend is different from equities, where investors are opting for index funds.
According to a recent survey of Barclays Capital, most investors planned to increase exposure to commodities.
Interest in index investments has however slackened, the bank said.
An explanation of this behaviour may come from the following. The spot price of the Standard & Poor's GSCI, which measures just the price appreciation of the underlying commodities, has gained 43 per cent this year. However, people who bought products that follow the index have seen returns of only eight per cent.
Similar problems have impacted other commodity products.
The $2.5bn US Oil ETF has risen 10 per cent in 2009. Their returns were much behind US crude futures' that gave 67 per cent returns.
Apparently, the reason for this is that, unlike stock index funds, commodity funds are hinged on futures contracts that terminate after a set period.
The contracts have to be renewed after they expire. With higher forward prices in many commodity markets, returns get reduced, even in a prospective market.
Most traded commodities
Following are the most traded commodities as of now this year.
Base metals
Even though it were gold and oil that hogged media limelight in 2009, base metals have performed reasonably well. Base metals prices have risen recently but analysts warn that it may not be because of basic demand.
Edward Meir, a senior commodities analyst with MF Global, had a note of caution despite the robust gains seen over the past week. "We would advise against joining the long side, as we continue to believe the recent gains are not justified based on the prevailing fundamentals. Granted, the technicals do look more compelling, but we still would be very cautious here," he said.
He linked the demand for base metals with the Chinese economic data.
Copper
Copper is at $6,939 (Dh25,490) a tonne, up $58. The complex has seen choppy trading for the past few days with no clear pattern emerging. Meir said the metal will find a support at $6750 an ounce and a resistance at $7,170. "Copper prices closed lower shrugging off Chinese import data and relatively constructive existing sales data out of the US. In the latter regard, November existing home sales rose by 7.2 per cent, their biggest advance since February 2007, but the enthusiasm may have been tempered somewhat by the fact that expiring tax credits may have artificially boosted the numbers," Meir said.
"Other macro numbers we saw disappointed somewhat; Q3 GDP was revised to 2.2 per cent from an earlier reading of 2.8 per cent, suggesting that growth projections for Q4 may get scaled down a bit," he added.
Aluminium
Aluminium is currently at $2,256, up $14. It is expected to find a resistance at $2,350 an ounce, according to Meir.
"We are seeing a pennant formation starting to take shape on the charts, an impending technical indication that we could stage another push higher," Meir wrote in his report.
Aluminium may find support from the fact that Venezuelan producers have recently been forced to cut production. That the Chinese producers have agreed to pay more for imported Alumina may also support the prices, Meir said.
"Chinese aluminium smelters have agreed to pay more for imported alumina in 2010, a move that could reduce margins going foward, but which the smelters have apparently done in order to secure units. Term prices for imported alumina will rise to 14.5 per cent to 15 per cent of the price of aluminium on the LME," Meir said.
Zinc
Zinc is at $2,476 a tonne, up $42, and prices are at fresh 2009 highs. "We may be on our way to two consecutive closes above $2,441, in which case a breakout will be in place," Meir noted. In case the metal's price falls, it will find support at $2,260 an ounce, he added.
Lead
Lead is currently trading at $2,324 a tonne. It is expected to rise, Meir noted pointing out that the next resistance it faces will be $2,480 a tonne. If lead falls, it is expected to find support at $2,230.
Nickel
Nickel is trading at $18,130 a tonne up $380. "We got two daily closes above $17,500, and are now in store for further gains given the technical breakout evident on the charts. Next resistance is at $18,700," Meir noted.
Tin
Tin is at $15,900, up $75, but prices are still having trouble closing above $15,900 resistance for two days. "If they do, tin could be on its way to a breakout," he said.
Gold
Gold recently rose above the psychological $1,100 an ounce mark on the back of a weakening dollar. Interestingly, it is now hovering around its long talked about year-end forecast. It had gone much beyond - $1,206 an ounce throwing all the previous predictions into a wide disarray.
Recently the bullion kept extending its losses as the dollar posted further gains after US housing data supported recovery signs. "We are firmly in holiday mode with thin trading volumes likely to result in erratic price movement through to the year end," Jeffrey Rhodes, CEO of INTL Commodities DMCC, wrote in his recent report.
Silver
Silver recently recovered from a dip to the 100 day moving average pegged at $16.75 an ounce to end the day just 2 cents lower at $16.98 with physical demand from India evident at these lower levels, which are some 12 percent below the year's high of $19.40 posted at the start of December, Rhodes said.
"The near-term direction will be [as ever] driven by movements in the gold price with the key chart point to watch on the downside the 100 day moving average. A clear break and close below this level would have chart watchers looking for further weakness to $16, although as with gold price prediction at this time of year is an even less exact science than usual," he said.
By Shashank Shekhar
© Emirates Business 24/7 2009
