London, 24 September 2010

Individual commodities have reasserted their identities, ceasing to move en masse, as the wave of investment has slowed and fundamentals of supply and demand have resurfaced. New money moved into a range of commodities, helping to drive a boom that culminated in 2008 when oil hit a record of nearly $150 a barrel.

The synchronised flow continued as recession led to economic stimulus and prompted cheap money to pour into a range of asset classes, but there are signs it has run its course. New York-registered investment manager Galtere Ltd, which has around a billion dollars under management, sees the start of a decoupling. "There is no longer one commodity trade where everything rallies and sells off in tandem," said Galtere analyst Paul Caruso in a telephone interview.

"We have seen commodities decouple because they are being driven by supply and demand fundamentals rather than purely investment flows." The stand-out supportive fundamental this year has been a wheat export ban from drought-hit Russia, which drove European benchmark milling wheat more than 60 percent higher in the five weeks to Aug. 5.

More bearishly, oil markets have battled against record U.S. fuel inventories. "There is a strong case to be made that the most upside opportunities should lie in grains and softs, which are the markets where we recognise the tightest balance sheets," Caruso said.

WEAK DOLLAR/HIGH STOCKS

Crude oil, by contrast, is expected to stay locked in a roughly $70-$80 range, drawing some support from the prospect of more economic stimulus and a sliding dollar, typically bullish for dollar-denominated commodities that become cheaper for holders of other currencies.

"U.S. dollar weakness may support fundamentally weak commodities. However we wouldn't expect dollar weakness to cause a fundamentally weak commodity such as crude oil to spike in the short term," Caruso said.

"U.S. dollar weakness should prevent crude from falling below $68/70 per barrel." Turning to the upside, ample supply would limit gains.

"A glut of stockpiles and spare capacity especially amongst OPEC nations are keeping a lid on the market. Any time crude gets to $80/$82, there's additional supply that can come in."

The expectation of stimulus and dollar weakness has been most bullish for gold , which has hit a series of records within reach of the psychological target of $1,300 an ounce. Caruso saw potential for further strength in gold, although he said the market had become "very crowded" after huge exchange-traded fund flows. While range-bound oil has lost its traditional role as an inflation hedge, gold is regarded as relatively safe for investors in the event of either inflation or deflation as the economy emerges from economic trauma. Galtere takes the view we are currently in a period of "inverse stagflation."

"Developed nations will go through a period of slow growth," Caruso said. "We see commodity real asset inflation driven by emerging market demand but deflation in widgets/financials because of over capacity."

Over the long run, even oil should rise. "Longer term, the next three, four, five years forward, I think there's a strong case to be made that emerging market demand will work through the inventories/spare capacity (i.e. demand outpaces supply) and I think this will support crude prices."

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