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Commods likely to recover after short correction

London, 19 May 2011: Reuters

Commodity prices are likely to fall further in the next month or two before rebounding towards the end of the year as demand continues to grow, prompting MF Global to expand its presence in the sector, a senior company executive said.

Brokerage MF Global Holdings, with a market value of $1.4 billion, maintained its long-term bullish outlook for commodities and expected prices to rise 10-20 percent over the next 12 months from current levels due to a weaker dollar, rising global demand and gradual inventory tightening.

"We will see some weakness between now and the end of summer and then I think we are going to see a steady move up," MF Global's head of commodities, Fred Demler, told Reuters on Wednesday. "I feel commodities are over-priced by 5 to 10 percent right now, but a year from now they will be 10 to 20 percent higher than they are now."

For commodities performance overview:

http://graphics.thomsonreuters.com/11/05/CommodsMay.html

Commodity correlations with the dollar:

http://graphics.thomsonreuters.com/11/05/CMD_CRRUSD0511_SB.html

Higher commodity prices may lead to a temporary slowdown in consumption, Demler said, but added he saw no long-term demand destruction. The 19-commodity Reuters-Jefferies CRB index has tumbled 9 percent since April 29 when hedge funds and other large financial investors began cutting their exposure to commodities.

Gold prices are down nearly 5 percent since April 29, with investor sentiment towards the precious metal turning more cautious as holders worry it may struggle to rise significantly after hitting record highs this month.

CONSOLIDATION

Gold rose for a tenth consecutive quarter in the three months to March, hitting record highs above $1,400 an ounce, buoyed by political turmoil in the Middle East and North Africa and lingering worries about indebted European countries.

Brent saw its largest daily drop in dollar terms on May 5, tracking the biggest one-day price drop in silver since 1980.

At one point, Brent was off by more than $12 a barrel, dipping below $110 for the first time since March. U.S. crude has slid about 15 percent since the start of May, silver 28 percent and copper about 5 percent.

"We are in a period of consolidation right now," Demler said. "But this commodities cycle is a long-term cycle." Commodities will likely start their steady recovery later this year as global inflation weakens the dollar, inventories tighten on rising industrial production and economic expansion boosts consumer demand, he said.

While the dollar had one of its strongest weeks last week, pushing the euro to its lowest since late March on Monday, the strength is seen short-lived by many and the greenback has still lost about 6 percent against the euro this year.

"In the longer term, we are going to see a weaker dollar, partly driven by inflation and that will be a longer-term positive for commodity prices," Demler said. Bermuda-based MF Global plans to expand its exposure to the commodity markets within the next few years, but Demler declined to provide a specific price outlook for oil, gold and other commodities.

MF Global, led by former Goldman Sachs Chief Executive Jon Corzine, plans to convert itself into an investment bank in the next 3-5 years. The company, which is currently in the process of transitioning from a broker to a broker-dealer, said its business model will focus on institutional capital markets, retail services, transaction services and asset management.

"MF Global is looking to build on the company's strengths - - commodities and futures and options. So I think Corzine will build on that, not reduce it," Demler said in a telephone interview from Hong Kong, where he attended the launch of a new gold futures contract.

Ends --


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