Commodity fund managers see sell-off as short-term
Fund managers investing in commodities futures and commodity-related stocks see this week's sell-off as a short-term dip before the prospect of tightening supplies drives a further rally.
Selling began in earnest on Thursday after weak economic data raised expectations of reduced commodities demand. It continued on Friday, taking one of the hardest-hit, silver, down almost 30 percent since the start of the month.
Brent crude, which hit a two-and-half-year peak above $127 last month, has fallen around 16 percent from April's close to a session low on Friday of $105.15 a barrel.
The 19-commodity Reuters-Jefferies CRB index rose by 0.3 percent in early trade on Friday after falling 5 percent on Thursday, its fifth biggest one-day fall on record, as traders and global macro hedge funds took profits.
Analysts said markets such as oil had plunged through significant technical levels and the selling had gathered momentum as trading models triggered sell orders.
Fund managers running some of the biggest commodities funds in Europe said the sell-off was a healthy correction and could pave the way for further rises over the medium to longer term.
"No one wanted commodities to rise too fast and to constrain GDP growth," said Colin O'Shea, head of commodities at Hermes, which manages more than $2 billion across the asset class.
"I see this as a positive for the market. This will take some steam out of the commodity rally -- I see it as more of a pause, a short-term correction, which should help the consumer globally."
O'Shea and others said that from a fundamental viewpoint little had changed as the market had been cleansed of excessive speculation, creating new buying opportunities.
Fabien Weber, co-manager of the JB Commodity Fund, which has some $700 million under management, said some traders had taken excessive positions on the oil market for instance in response to violent unrest in producer countries.
"The market is being cleaned of all the people who were indiscriminately long," he said.
Angelos Damaskos, manager of the equity-based Junior Oils Trust and the Junior Gold Trust, which have around $105 million under management between them, said monetary stimulus and the weak dollar had helped to drive the speculative push into commodities.
For now the move was exaggerated, but weakness in the dollar remained a reason to buy "real assets" such as commodities and particularly gold, which could reach $1,600 an ounce by the year-end, he said.
"We're still quite bullish medium term, especially if the developed economy starts growing and if demand from Asia continues to be strong, we could easily be in a situation where demand outstrips supply.
"It (oil) could well hit all-time highs. I don't see very much supply coming on to the market."
For the second quarter, however, U.S. crude could fall below $85 a barrel, he said, the bottom of the broad $85-$100 range Damaskos predicted for the rest of the year.
Sean Corrigan, chief investment strategist at Diapason Commodities Management, also saw gold as among the least vulnerable commodities, saying it remained relatively a safe haven.
"Gold could go to the $1,425 area from here, but I would expect it to be the least damaged because there's a natural rotation back from cyclicals and gold tends to do relatively well in those circumstances," he said.
Weber agreed commodities could go lower before recovering, but added he remained overweight gold, livestock and energy.
"If you don't believe in a strong worldwide economic slowdown, the consumption of crude oil will continue to rise," he said. "I see this as a short-term correction."
Christopher Wheaton, who runs the Allianz RCM Energy Fund, with more than 174 million euros ($252.8 million) under management, also took the sell-off in his stride.
"This is a wobble," he said. "There was little fundamental reason for the oil price to do what it did -- you're just seeing a healthy reassessment of views."
But he thought the wobble could go on for some time. "It's almost like Wile E. Coyote when he runs off a cliff -- his legs are still going, then he stops and looks down, and that stops and looks down moment is what we've just had in the market."
"It's started but it hasn't finished. I suspect this will go on for a while -- we are only three days into it," Wheaton said.
[Source: By Claire Milhench and Barbara Lewis, Reuters, London, 06May11]
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