Raw-material bull market fading as supply expands

Dow Record

The Dow Jones Industrial Average reached a record today and the S&P 500 climbed to its all-time closing high last week. The Dollar Index, which tracks the currency against six trading partners, advanced 3.9% since the start of January. The S&P GSCI is trading 27% below the peak it reached in July 2008.

Commodities revenue at the 10 largest banks fell 24% to $6 billion last year, the first drop since at least 2008, according to Coalition, an analytics company. Goldman Sachs Group Inc. ranked first in 2012, followed by JPMorgan Chase & Co. and Morgan Stanley, the London-based group estimates.

Smaller price swings may be curbing profit. The 100-day measure of volatility in the S&P GSCI dropped to 11.5 on March 18, the lowest since 1996, data compiled by Bloomberg show.

The commodities supercycle, or longer-than-average period of rising prices, is over, Citigroup Inc. said in a November report. China, the biggest user of everything from copper to cotton to coal, is slowing and years of higher prices encouraged more supply, the bank said. The retreat in raw materials in February reinforced that view, Ed Morse, the global head of commodities research in New York, said in an e-mail March 25.

Commodity Assets

Commodity assets under management fell 3% to $410 billion this year, now about 9% below the record $451 billion reached in April 2011, according to Barclays. Hedge funds and other large speculators were their least bullish on commodities in four years by mid-March and are betting on lower prices for everything from hogs to copper to wheat, U.S. Commodity Futures Trading Commission data show.

Trading one commodity against another or wagers across different delivery dates for the same raw material are the best options in the next several months, said Jason Lejonvarn, a commodities strategist at Hermes Investment Management Ltd., which oversees $2.3 billion of raw-material assets.

The economic outlook is too weak for all commodities to rise together, and a stronger dollar combined with accelerating supply will curb gains for copper and oil, Barclays said in a March 21 report. It recommended betting against U.S. natural gas and selling industrial metals should prices rally. Investors can still profit from individual commodities, a strategy that probably will beat indexes this year, the bank said. Hedge funds increased net-longs across 18 commodities by 10% in the week ended March 26, CFTC data show.

TVs, Batteries

Silver will average $31.95 an ounce in the second quarter, or 16% more than now, according to the median of 20 analyst estimates compiled by Bloomberg. Silver benefits from both investor demand as well as economic growth, because 53% of the precious metal is used in everything from televisions to batteries.

Platinum will average $1,700 an ounce, a gain of 7.9%, the median of 17 forecasts shows. Holdings in exchange- traded funds backed by the metal reached a record last week, according to data compiled by Bloomberg. Barclays expects output to drop to a 13-year low as mines in South Africa close.

Arabica will average $1.57 a pound, 15% more than now, based on the median of six estimates. Coffee roasters are adding more of the beans to their blends at the expense of the robusta variety after prices fell 42% since January 2012. Nickel will average $18,000 a metric ton, or 10% more than now, the median of 22 estimates shows.

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