Upward trend for commodities expected in 2010

News - Tax

Written by Ray Clancy

Thursday, 04 March 2010 09:48

Commodities are expected to continue on an upward long term trend with demand and supply playing a dominant role in 2010, according to investment experts.

The demand for gold, especially from gold ETFs is growing and prices for agricultural commodities like livestock is rising due to a fall in supply, it is claimed.

Most commodities have recovered sharply from lows in 2009 and a sharp increase in demand has been triggered by strong growth in China, according to Dirk Kubisch, product specialist for the Julius Baer Natural Resources and Agriculture Funds

‘Performance differentials between certain commodities increased towards the end of the year, mainly due to supply and demand dynamics. Supply and demand will continue to play a dominant role in the pricing of commodities in 2010,’ he explained.

He says that the most compelling investment opportunities lie in commodities where demand will outstrip supply. These might include where falling prices have reduced capital expenditure, restricting long term growth on the supply side, for example platinum, palladium, uranium and zinc.

Another prospect is where prices have fallen to such an extent that suppliers’ profitability is compromised, leading to production cuts with examples including pork and beef. Also where the capacity utilisation is increasing, but structural or logistical problems are limiting supply, for example copper.

‘We expect the oil price to rise over the long term, especially given the difficulties involved in meeting rising demand with the reserves available. However, as the OPEC member states have enough capacity to cover rising demand over the medium term, the oil price should remain at US$70 to 80 per barrel.

He also reckons that industrial metals potentially have good prospects for price gains as emerging markets urgently need them for further expansion.

Central banks recently showed interest in gold, as reflected in recent purchases including by the Reserve Bank of India. Sales from reserves have also fallen, restricting supply. Meanwhile, demand for gold, especially from gold ETFs, is growing.

He points out that the agriculture sector lagged commodities in general last year, creating good opportunities in some agricultural commodities, especially livestock. ‘Falling prices have prompted many producers to reduce the size of their herds significantly. This tightening on the supply side could lead to price increases,’ said Kubisch.