Commodities revival to continue in 2017: Hedge funds

New York: Commodities had a resurgence in 2016, with the first annual advance since 2010. The gains will continue next year for many of the markets, at least that’s what hedge funds are signalling.
Money managers boosted their combined net-long position, or bets on prices gains, across 18 commodities by 9.7 percent in December, government data show. A year earlier, the funds were net-short, or wagering on declines. Investors last week added to bullish positions in cotton, cattle, crude oil and soybean meal, but aren’t optimistic for corn, cocoa and wheat.
After five years of losses, raw materials rebounded as supply gluts receded for metals and energy. There’s a growing chorus of voices that says the rally isn’t over. Citigroup Inc, the bank that was ahead of the game back in 2012 when analysts declared the end of the super cycle of rising demand and price, now predicts that most commodities will perform strongly in 2017 as global economic growth picks up. Goldman Sachs Group Inc in November recommended an overweight position for the asset class for the first time in more than four years.
Commodities have become “a very attractive asset class,” said Quincy Krosby, a market strategist at Prudential Financial Inc, which oversees about $1.3 trillion. “You began to see stimulus spending in China, along with monetary policy designed to bolster demand and growth. And also, you began to see pickup in economic activity in the US, suggesting that commodity prices would be bottoming and gaining.”
The net-long position across 18 US-traded commodities contracted 3.9 percent to 1.08 million futures and options in the week to December 27, according to US Commodity Futures Trading Commission figures published three days later. A year earlier, funds were net-short 21,081 contracts.
The Bloomberg Commodity Index, which tracks returns for 22 components, climbed 11 percent in 2016, entering a bull market in June. Zinc was the year’s best performer, surging 60 percent amid supply shortages and mine cutbacks. On the other end of the spectrum, wheat had the biggest losses spurred by rising global stockpiles.
Industrial metals made a surprise jump in the last quarter of 2016, with copper posting a gain of 13 percent—the biggest such advance since 2010. The gains were propelled by a drop in London Metal Exchange-monitored inventories and speculation that President-elect Donald Trump’s pledges on infrastructure building will increase demand. Money managers have more than tripled their copper net-bullish position since early November.
While Trump’s victory boosted copper, it’s had the opposite effect for precious metals. Gold capped a 13 percent decline in the fourth quarter as the end of a heated American election cycle gave way to some political stability and as US equities rallied to records. Funds have been dumping gold holdings since mid-November, and last week cut their net-long position by 23 percent to 41,247 contracts. Bullion still had its best annual gain since 2011. As analysts eye an uncertain outlook for the Trump administration, they’re expecting gold will pick back up and forecast that prices will rally about 13 percent in 2017, according to a Bloomberg survey.