March 11 (Bloomberg) -- Hedge funds cut bets on a commodity rally to a four-year low on signs of surplus supply in everything from coffee to zinc before Goldman Sachs Group Inc. said prices had fallen too far and investors should buy.
Speculators reduced net-long positions across 18 U.S. futures and options in the week ended March 5 by 9.2 percent to 405,885 contracts, the lowest since March 2009, U.S. Commodity Futures Trading Commission data show. They are the most bearish on copper in four years, and are also betting on declines for coffee, hogs, sugar, soybean oil, wheat and natural gas.
Commodities retreated 5.1 percent since reaching a four- month high Feb. 13, even as optimism about the global economy drove the MSCI All-Country World Index of equities to a 56-month peak. Supplies will outpace demand for 12 of 18 metals and agriculture goods, according to Barclays Plc and Rabobank International. Goldman raised its three-month outlook for raw materials to "overweight" from "neutral" on March 7, saying accelerating Chinese growth will support prices.
"There is a disagreement about the extent of how much demand for commodities will rise based on growth," said Jack Ablin, who helps oversee about $66 billion of assets as chief investment officer of BMO Private Bank in Chicago. "Commodities became a victim of their own success as higher prices have created more supplies. People who have been looking for a vehicle that can generate income and keep pace with inflation have invested in equities."
The Standard & Poor’s GSCI Spot Index of 24 commodities climbed 1 percent last week. The MSCI equity index gained 1.8 percent, while the dollar rose 0.5 percent against six trading partners. Treasuries lost 0.9 percent, a Bank of America Corp. index shows. The GSCI gauge slid as much as 0.6 percent today.
The raw-materials index rallied 85 percent in the four years to Dec. 31 as record global stimulus measures revived economies and sent prices of gold, corn, soybeans, copper and cotton to records. A weakening dollar also increased the appeal of commodities denominated in the currency. The dollar climbed 3.7 percent against six major trading partners this year, the best start since 2009.
Investors pulled $4.66 billion from commodities this year, according to EPFR Global, which tracks money flows. That compares with an inflow of $5.05 billion a year earlier, the researcher said. Commodity assets under management totaled $430 billion in January, from a record $451 billion in April, data from Barclays show.
Funds are dumping commodities as increasing supply outweighs the improving economic outlook that sent the Dow Jones Industrial Average to a record high last week. The 120-day correlation between the S&P GSCI and the MSCI All-Country World Index has weakened to 0.47, from 0.72 in June, data compiled by Bloomberg show.
Crude-oil stockpiles in the U.S., the biggest consumer, are at the highest level since the end of June, a government report showed March 6. Copper supplies monitored by exchanges in New York, London and Shanghai have jumped to the highest since December 2003. Global inventories of wheat and soybeans will be higher than forecast a month earlier, the U.S. Department of Agriculture said March 8.
The slump in raw materials is "overdone" and prices will rebound in the next three months as China’s economy accelerates, Jeffrey Currie, Goldman’s head of commodities research in New York, said in the March 7 report. Copper will increase 16 percent to $9,000 a metric ton in six months, the bank said.
China maintained its expansion target at 7.5 percent for 2013 and spending will rise to "maintain support for economic growth," Premier Wen Jiabao said March 5. The country plans to open 5,200 kilometers (3,232 miles) of new railway lines and build 80,000 kilometers of highways, a report from the National Development and Reform Commission showed the same day. Urbanization will boost the nation’s metals demand, Jiangxi Copper Co., China’s largest producer, said last week.
Payrolls in the U.S. rose 236,000 last month, Labor Department figures showed. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008. The U.S., the biggest economy, consumes the most corn and is the biggest metals user after China.
"We do see demand coming back for commodities as the U.S., China and other emerging markets are showing signs of acceleration," said Rob Haworth, a senior investment strategist at U.S. Bank Wealth Management in Seattle, which oversees about $110 billion of assets. "This is a good time to build commodity positions as a demand boost may help perk up prices."
Fund managers pulled $990 million from commodity funds in the week to March 6, according to Cameron Brandt, the director of research for Cambridge, Massachusetts-based EPFR. Outflows from gold and precious-metals funds totaled $1.12 billion, he said. Holdings in exchange-traded products backed by gold contracted a record 106.2 tons last month, and another 21.9 tons in March, data compiled by Bloomberg show.
Bets on declining copper prices more than doubled to a net- short position of 16,391 futures and options, the CFTC data show. That’s the most negative outlook since March 2009. Traders are the most bullish in five weeks, with 13 analysts surveyed by Bloomberg expecting prices to rise this week. Four forecast declines and three were neutral, the highest proportion of bulls since Feb. 1.
China’s inventories of steel reinforcement-bar jumped 86 percent this year, according to data from Shanghai Steelhome Information. The country’s copper imports tumbled 38 percent from a year earlier to 298,102 tons in February, the lowest in 20 months, custom figures showed March 8. Global supplies of the metal will outpace demand by 56,000 tons this year, Barclays estimates. Zinc will have a surplus of 273,000 tons, and aluminum of 1.82 million tons, the bank forecasts.
Bullish gold wagers dropped 27 percent to 39,631 futures and options, the lowest since July 2007, the CFTC data show. The holdings are down 61 percent this year. Those for silver tumbled 47 percent to 6,118 contracts, the biggest slump since June, and platinum wagers fell 8.7 percent to 30,705.
Crude-oil wagers slid 4.4 percent to 167,498 contracts, the lowest since Jan. 1. The net-long position in heating oil tumbled 61 percent.
A measure of speculative positions across 11 agricultural products from wheat to coffee to cattle fell 3.4 percent to 140,580, the lowest in almost four years.
Wagers on a decline for coffee increased to 24,671 contracts, and were at a record bearish outlook of 28,454 in the week ended Feb. 19, the CFTC data show. Supply will outpace demand by 6.73 million bags this season, each weighing 60 kilograms, from a 1.08 million-bag shortfall in the previous season, Rabobank forecasts.
"In the past couple of years everyone had been enthusiastic about commodities being the diversifying risk trade, and that seems to have changed," said Frances Hudson, who helps manage about $263.9 billion of assets as a strategist at Standard Life Investments in London. "Also, the dollar has been playing a huge role as it has jumped against other currencies. Investors have been disappointed by the broad commodity performance and have continued to withdraw."
--With assistance from Nicholas Larkin in London. Editors: Millie Munshi, Patrick McKiernan
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