Analysts Bullish On Commodities

Aug 1 2007 | 8:23am ET

Investors spooked by the sub-prime market may need to look no further than the commodities space to park their capital. A group of commodities analysts say that investing in commodities is the way to go for investors with a penchant for gold and an eye for oil and agriculture.

High Oil Prices Good News For Some

“Global demand for oil is expected to rise by 50% in the next 25 years,” says Phil Flynn, vice president and senior market analyst at Alaron Trading Corporation in Chicago. Flynn, speaking at seminar hosted at the by the CME Group, says that the run up in oil demand and prices is not necessarily a bad thing, as it is a byproduct of economic growth.

“A 10-year chart of the Dow Jones Industrial Average overlayed with chart of oil shows that they’re moving into the same direction. As the price of oil has risen, unemployment in the country has fallen,” he says.

Flynn predicts that oil prices will reach $85 per barrel by the end of the year. “In China the demand is at record highs and will continue to rise. A strong stock market coupled with a weak Dollar suggests that demand here in the U.S. will grow steadily for the remainder of year.”

He also forecasts gasoline prices going up along with crude oil “because refiners are focusing dramatically on building gasoline supply” and heating oil increasing to a high of $3 per gallon next January. “If we have any major heat or major weather events, don’t be surprised to see natural gas also go up,” he says.

Golden Year

The gold market is expected to be well-supported through year-end, with a move into the $700 to $732 range anticipated, according to Tom Pawlicki, precious metals and energy analyst at MF Global in Chicago.

“While occasional quick liquidations are possible, they will likely be tied to the latest round of sub-prime fears rather than any bearish gold-centric news,” says Pawlicki. “Gold may experience an increased correlation with the stock market as a result. Longer-term, however, gold should find support from a return of fund and investment flows, moderate global economic growth, seasonal jewelry demand, a weak dollar, and technical issues.” 

Pawlicki explains that India is largest consumer of gold jewelry in the world, taking in 23%, with the U.S. and China following at a distant second and third at 13% and 10%, respectively. “The [Indian] wedding season occurs in November and December, and there are two gold-buying holidays that occur in mid-October and early November.”
Corn, Wheat Prices Surge

And if metals or energies are not your cup of tea, then maybe the agricultural market is. Jack Scoville, vice president of Chicago-based Price Futures Group, says there are several key economic factors that are driving agricultural futures and prices upward including the weakness of the dollar, the U.S. government’s mandate of increased use of ag-based fuels such as ethanol and biodiesel, and changes in government spending and taxation.

“At the moment wheat is the high-flyer due to weather problems here and in Europe, but prices overall should stay strong into 2008,” says Scoville. “There’s a chance we could continue to see this rally move higher and move closer, if not match, those all-time highs of $7.50 a bushel.”

Investor Confidence

Overall, Daniel Raab, managing director at AIG Financial Products Corp., says he has seen continued interest from investors in the commodities market driven largely by the growing understanding of the importance of diversifying their portfolios by blending together different asset classes. “Commodities continue to attract investor dollars. As investors have become more familiar with this asset class, they’ve also become more sophisticated and terms such as contango and backwardation are no longer unfamiliar to many investors,” he says.

“At end of 2003, there were $500 million in assets tied to the Dow Jones AIG Index rising to $9 billion by the end of 2004. The Dow Jones-AIG Commodity Index has continued to serve as a useful benchmark for these investors with an estimated US$38 billion as of the end of the second quarter {this year] tracking the Dow Jones-AIG group of commodity indexes on a global basis”

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