New York, 11 December 2009

Reuters: Commodities may be falling now after rising too far, too fast in a recession year, but the cyclical nature of these markets means another price explosion may be coming, investors and strategists at the Reuters Investment Summit this week said.

Some of the world's most influential investors said the correction in prices for energy, metals and crops this month was warranted after prices had risen with few stops since the end of September.

But they also pointed to a historical fact about commodities that belies the law of gravity: what comes down must go up.

"Things may have come up too much, too fast. ... But is that the end of the bull market? Hardly," said Jim Rogers, one of the biggest bulls in the commodity rally this decade.

"Oil has gone down 40 or 50 percent four times since 1999. It's not ended the bull market in oil," Rogers said.

Commodities have stumbled since the start of December after debt woes in Dubai and Europe rekindled global financial fears and drove up the U.S. dollar, whose weakness in recent months had contributed sharply to prices.

Oil and wheat have lost almost 10 percent of their value since the month began. Gold, which began December with record highs above $1,200 per ounce, is down about 5 percent from November's close.

The sell-off may continue into the year-end as markets react to burgeoning stockpiles of raw materials that indicate lagging demand and traders resort to book-squaring before the year is over, analysts said.

But 2010 and beyond could be a different story, especially if inflation starts rising from the currency debasement caused by governments around the world printing more money to manage the financial crisis.

The amount of money held in reserve by banks with the U.S. Federal Reserve has risen to about $1.14 trillion from about $634 billion a year ago, indicating new cash that has come into the financial system.

An out-sized economic recovery, especially in emerging markets, could also lead to a surge in demand for raw materials.

"Barring shocks, we believe there's going to be sustained GDP growth coming from the emerging market countries that will benefit commodities," said Jonathan Xiong, director of San Francisco-based Mellon Capital Management.

Xiong, who oversees commodities as part of Mellon's $18 billion portfolio, said he was overweight on gold and agricultural futures and underweight on energy because of supply issues.

"Commodities are very momentum-driven and there's still quite a bit of momentum left in the markets," Xiong said.

Ken Volpert, head of the Vanguard Group's taxable bond group, also anticipated greater consumption in 2010 from giant nations like China and India, which he said could be a bigger driver for commodity prices than a weaker dollar.

"The present correction looks like just a phase," he said.

Max Darnell, chief investments officer at First Quadrant, which has about $18 billion under management, forecast U.S. oil prices to return above $80 a barrel by the first quarter.

Rogers encouraged investing in agriculture, silver, palladium and natural gas -- commodities that he said were depressed and present more opportunity for gains.

If there was one commodity investors seemed unsure about, it was gold. Both Darnell and Rogers said they wouldn't buy the precious metal at current prices.

But Bill Gross, head of Pacific Investment Management Co., the world's biggest bond fund, said he thought gold was a commodity that works in good and bad times.

Although the debate over gold often centers on inflation and currency debasement, Gross said, "Even to the extent that re-flation collapses, and we took off in the other direction, gold is a good safe-haven investment."

Ends

(For summit blog: blogs.reuters.com/summits/) (Editing by Leslie Adler)