Global recovery sparks interest in commodities

AS THE prospects of a global recovery have returned, so have rising commodity prices. And while it is oil that is dominating the headlines, the surge is happening across the board. According to the S&amp;P/Goldman Sachs Commodity Index, raw material prices rose 20 per cent in May and the Baltic Dry Index &ndash; a measure of shipping activity &ndash; rose 130 per cent last month.<br /><br />Expectations of lower demand in the second half of 2008 weighed heavily, but a return of risk appetite and, most recently, a slowing pace of decline in manufacturing, have boosted commodity prices. <br /><br />Rising prices and an improvement in expectations have seen investors return to the commodity markets. Figures from Futures Industry Magazine show that, despite the credit crisis, the market for non-precious metals derivatives increased by 64.5 per cent and by 38.7 per cent for agricultural derivatives.<br /><br />This has continued into 2009 according to contracts for difference (CFDs) provider Saxo Bank, which for this very reason launched a range of commodity CFDs in response to client demand last week. <br /><br />Saxo Bank is now offering traders up to 20 CFDs including old favourites such as oil and precious metals, but also more exotic commodities such as soybeans and wheat. This comes just a month after derivatives broker ICAP launched a new broking service for global iron ore derivatives. <br /><br />There&rsquo;s no doubt that buying interest in commodities has been sparked, but what was behind this? Julien Jessop, chief international economist at Capital Economics, says that if you take a closer look at the relative performance of different commodities since March, then recovery hopes appear to have played the biggest role.<br /><br />&ldquo;The rally has been led by the prices of industrial metals, which are typically most sensitive to the economic cycle, followed by oil. In contrast, traditional hedges against inflation, namely precious metals and especially gold, have performed relatively poorly,&rdquo; he says, explaining that precious metals have done relatively badly because so far there has been a limited rise in inflation expectations. <br /><br /><strong>FINAL DEMAND</strong><br />But he warns that while traders have surely taken advantage of lower prices to rebuild stocks in anticipation of a substantial pick-up in final demand, this has yet to materialise.<br /><br />The agricultural commodity market is a less well-known beast but because its supply is so susceptible to weather conditions, it can be extremely volatile &ndash; and by extension, profitable &ndash; for CFD traders. Mostly traded on the Chicago Board of Trade, grains have risen strongly of late, thanks to dry weather narrowing the window in which farmers can plant wheat, which reduces expectations of future supply.<br /><br />However, the US department of agriculture&rsquo;s updated forecasts for the amount of grain and oilseeds left in storage this autumn and a year from now will be released tomorrow. The department is expected to reduce its forecasts, showing further constraint on supply. <br /><br />The volatility in the commodity markets has seen their popularity grow over the past three months. Buoyed by a return of global risk appetite and prospects of an economic recovery, commodities are once again marching upwards. It&rsquo;s time for clever traders to look beyond oil and gold.