Commodities | Jan 25 2008
By Chris Shaw
In line with the performance of equity, currency and bond markets commodity prices have been very volatile over the past few days, a trend Barclays Capital expects will continue for the shorter-term at least given ongoing concerns over the global growth outlook.
A look back at previous periods of equity market volatility shows investors tend to lower their exposure to the commodities sector during such times, but Barclays takes the view this is the wrong approach as both spot prices and returns in the sector tend to increase when equity market volatility is high.
Taking the period from 1993 to the end of last year into consideration the group notes periods of negative returns on the S&P have coincided with quarterly commodity returns of around 5.9%, showing while equity markets can impact on sentiment in the sector commodity prices are not strongly correlated to equity market returns.
Looking at the current situation the group suggests the precious metals are best placed to continue to perform well (as evidenced by the strong gains in the gold price overnight) so Barclays recommends staying long of gold.
Fundamentals support such a view as the market remains tight, the US dollar appears headed lower given further cuts to official interest rates in the US are seen as likely and investor interest in the metal remains high.
The agricultural sector also looks attractive as the group notes demand is likely to be relatively immune to the goings on in financial markets, while the combination of low inventories and growing demand is an attractive one.
Base metals in contrast appear vulnerable as the latest rate cut has provided some short-term support but concerns over global growth prospects remain. Copper in particular is supported by a relatively tight market but in Barclays view there needs to be some improvement in the market’s outlook for economic growth before prices can move higher.
Zinc prices are likely to fall further in the group’s view as the market prices in additional supply, while aluminium appears set to continue range trading in coming months as there is no shortage of the metal. The fundamentals offer some support for tin prices, while the group suggests further downside for nickel appears limited.
A consolidation is likely in the oil market shorter-term in the group’s view as while the market remains tight a seasonal fall in demand in the June quarter should cap prices to some extent, though longer-term there remains upside risk from growing demand and weak non-OPEC output.
