Commodities' Near-Term Risk Increases

Adrian Day's Global Analyst (11/17/2009)
"That shift in the world's economic center to Asia and emerging markets is behind the Resource 'supercycle.' This quarter, however, commodities were up 'only' 4% (DJ UBS Commodity Index). Performance was not uniform; many agricultural commodities fell, as did uranium, while oil was essentially flat, and many metals continued their strong moves up.

In the near term, we are cautious. With rallies from their annual lows of 40% to over 100%—copper up 120%—some of the metals have started to falter over the past month. A primary driver of the recent strong moves was restocking of depleted inventories, particularly by China. Chinese imports have been running far ahead of end-use consumption, and there are now signs (such as the sharp decline in the Baltic Dry Index, the build-up in LME inventories, and backwardation in copper futures) that this is ending, albeit in our view temporarily.

A broad decline in commodities could put some downward pressure on gold as well, following its strong rally. Gold's performance, since the end-August breakout, has been powerful, holding gains above $1,000 after a very minor bout of profit taking, and that despite recent (modest) dollar strength."

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