Barclays Capital measured commodity capital inflows as one of the lowest since 2002 with new money increases of only $15 billion, down from $67 billion in 2010 and $77.1 billion in 2009. Total AUM for commodities is at $399 billion up $19 billion for the year. The commodity inflows were negative after the first quarter of the year. The commodity markets peaked in April of last year, so the momentum for commodities has been negative.
A good portion of this decline is associated with momentum in the commodity markets. With the major commodity markets down relative to equities, there has been a shift back to traditional assets. Nevertheless, inflows have been stronger in 2011 for precious metals. Again this is a momentum story.
Is this the end of the super-cycle? It is unlikely because the fundamental demand for commodities is still strong based the growth in emerging markets. In the current environment, commodities should do well if there is a strong equity market. An strong equity market will signal more risk taking and expectations that economic growth will be stronger.
This does not mean that all commodities will increase as localized effects such as production of US natural gas will cause a decline in prices, but for futures that have a very global reach there should still be upward pressure over the longer run. This should especially be the case for agricultural markets. Again, weather will make some of the localized effects more important but inventory to usage suggests that there is greater risk of stop-outs. additionally, with the Fed setting inflation targets and continuing to force real interest rates negative, there is a strong demand for holding real assets.
An abandonment of the herd in commodity markets does not change the story for holding commodities.
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