Investor demand for commodities, usually not physical but as cash-settled instruments, is an important driver of prices and although supply/demand fundamentals assert a powerful influence over demand from the sector, sentiment and alternative investment opportunities also play a key role in driving appetite.
With global growth moderate at best and emerging market growth appearing to slow, particularly in China, which consumes 40-45% of most of the world’s key commodities, perceptions of future demand are at best soft.
As Philip Saunders, head of the global multi-asset investment business at Investec was quoted in Reuters as saying, “The trouble is the type of growth we’re likely to get is not really commodity-intensive type growth. So we expect a weaker Chinese growth picture next year, and we think monetary conditions there are tightening.”
HSBC’s flash manufacturing PMI for this month showed manufacturing activity slowing even as internal consumption kept GDP growth positive. Most fund managers have reduced investments in commodity assets, from typically around 6% of portfolios at the peak of the super cycle to around 2% now.
Which metals are affected?
Positions in copper and gold are being actively reduced by some with only PGMs platinum and palladium still in favor due to supply worries from South Africa.
Gold Prices to Drop?
Reuters reports that all fund managers polled at the recent Reuters Global Investment Outlook Summit are either bearish or neutral on gold, saying many investors bought gold on fears that loose monetary policy would fuel inflation, which has failed to materialize. As a result, eligible gold stocks sitting inside U.S. exchange warehouses have risen to a seven-month high, a sign that physical demand has weakened after April’s historic price drop unleashed a bout of pent-up physical buying in Asia.
The return of some of the gold to the warehouses after an earlier outflow suggested the wave of physical buying might have run its course, removing a key support to prices. Since then, the premium for physical gold being paid in China has fallen, and in late October fell to a discount to spot for the first time this year as fears of a credit tightening prompted investors to sell bullion for cash.
Outflows from ETFs reported earlier this year on this site have continued, so far reaching about 700 tons while demand from central banks is down a quarter year on year amid concerns over volatility. Goldman Sachs, often a market mover by the weight so many investors put on their predictions, are predicting gold will drop to $1,050 in 2014.
Alternative investments to commodities are not a whole lot better. The Dow Jones share indices are hitting record highs, not because the economy is earth-shatteringly strong, but because investors have limited options. The lack of yield in fixed interest assets and the volatility in commodities is channelling funds into equities even as US data is ‘mixed,’ to say the least.
Base Metal Outlook?
But most fund managers seem to prefer emerging market equities and debt to commodities in a more risk-friendly environment. If that reduces volatility in base metal prices next year, most consumers would cheer.
With oversupply in aluminum, copper and nickel, it is only lead and possibly zinc in 2015 that are seen as having much upward potential.