Cur­rency weak­ness boosts com­modi­ties

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GLOBAL in­vest­ments in com­modi­ties rose by more than a fifth in the first quar­ter to $400 bil­lion, help­ing boost prices as in­vestors sought a buf­fer against in­fla­tion and a weaker dol­lar, Cit­i­group Inc an­a­lysts say.

In­vest­ments in com­mod­ity in­dexes rose $40 bil­lion in the first three months of the year to $185 bil­lion, a larger gain than the whole of 2007, Cit­i­group an­a­lysts Alan Heap and Alex Tonks say in a note to clients.

A ‘‘ tidal wave of in­vest­ment flows into com­mod­ity mar­kets has fur­ther boosted prices,’’ the an­a­lysts say. ‘‘ The weak­en­ing US dol­lar has been the main macro force at­tract­ing funds to com­mod­ity mar­kets. Other con­trib­u­tors are fall­ing real in­ter­est rates and in­fla­tion wor­ries.’’

The UBS Bloomberg Con­stant Ma­tu­rity Com­mod­ity In­dex of 26 fu­tures rose to close at a record on March 5. The gauge climbed 22 per cent last year for a sixth con­sec­u­tive an­nual in­crease and has ad­vanced 17 per cent this year, while the Stan­dard & Poor’s 500 In­dex gained 3.5 per cent in 2007 and has fallen 6.5 per cent this year. Most-ac­tive crude oil, gold, plat­inum, wheat, corn and soy­bean fu­tures are among those that set records this year.

Af­ter in­vest­ments in in­dexes, com­mod­ity trad­ing ad­vis­ers ac­count for the big­gest por­tion of the to­tal amount in­vested, the Cit­i­group an­a­lysts say. At the end of the first quar­ter, ad­vis­ers ac­counted for $94 bil­lion, 18 per­cent more than at the end of last year, the an­a­lysts say.

Hedge funds ranked third, with $75 bil­lion in com­mod­ity hold­ings, an in­crease of 25 per cent over the end of 2007, Heap and Tonks say. In all, they es­ti­mate $70 bil­lion in ad­di­tional in­vest­ment funds flowed into com­modi­ties mar­kets in the first quar­ter.

Ex­change-traded funds, or ETFs, ac­counted for $46 bil­lion in com­mod­ity in­vest­ments as of March 31, up 31 per cent from $35 bil­lion at the end of 2007.

ETFs track eq­uity, bond and com­mod­ity in­dexes and are of­ten cheaper and eas­ier to trade than sim­i­lar mu­tual funds.

The ‘‘ tidal wave’’ of the past quar­ter is show­ing ‘‘ signs it is al­ready ebbing,’’ Heap and Tonks say. ‘‘ We don’t think it is sus­tain­able.’’

The credit cri­sis that be­gan last year has made it ‘‘ harder to get fi­nance to build new sup­ply ca­pac­ity and to build new in­fra­struc­ture,’’ cool­ing de­mand, Heap and Tonks say. The ef­fects of the credit cri­sis on eq­ui­ties mar­kets ac­cel­er­ated the flow of in­vest­ment funds into com­modi­ties, which they say also may prove tem­po­rary.

‘‘ There was no con­vic­tion re­gard­ing fi­nan­cial as­sets,’’ Jim Vail, who man­ages $1.5 bil­lion in nat­u­ral-re­source funds at ING In­vest­ment Man­age­ment Co in New York, says.

‘‘ It was a sea­sonal top in com­mod­ity prices,’’ Vail says. ‘‘ There’s go­ing to be some pull­back, and I look at that as an op­por­tu­nity. In this type of en­vi­ron­ment, where sup­ply con­straints are re­peat­ing them­selves, it’s go­ing to keep prices higher.

‘‘ Cap­i­tal costs are also higher. As the mar­ginal cost of pro­duc­tion con­tin­ues to in­crease, it tells you where prices are go­ing.’’

Long-term fun­da­men­tals of ris­ing de­mand and con­strained pro­duc­tion, which have stim­u­lated in­vest­ment in re­cent years, re­main in­tact, yet some in­vestors have started cut­ting their bets on ris­ing raw-ma­te­ri­als prices since the end of the quar­ter, Heap and Tonks say.

The dol­lar’s de­cline, while pro­vid­ing a short-term boost to prices from in­vestors seek­ing a store of value, may not last if the weaker US cur­rency fails to stim­u­late eco­nomic ac­tiv­ity to in­crease con­sump­tion of raw ma­te­ri­als.

A fall­ing dol­lar’s ef­fect on fu­tures also may fade if it de­presses prices in pro­ducer cur­ren­cies, erod­ing prof­its, Heap and Tonks say.

Fu­ture in oil: Traders make their bids

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