Sunday, June 05, 2011

Trees cannot grow to the sky

How could there possibly be a bubble with this type of money flowing in to passive commodity investment funds? Again, ever since commodities became an "asset class" whose returns are "uncorrelated" with the broader market, these funds have proliferated with astounding speed and are one of the chief reasons we see commodities enjoying their historic (soon to be infamous) run.

June 6 (Bloomberg) -- Funds boosted bets on rising commodity prices to the highest in four weeks, led by copper, amid signs that the global economic recovery will remain resilient and boost demand for raw materials.

Speculators raised their net-long positions in 18 commodities by 7.3 percent to 1.26 million futures and options contracts in the week ended May 31, government data compiled by Bloomberg show. That’s the highest since May 3. Copper holdings more than doubled. A measure of bullish agriculture bets also climbed as adverse global weather curbed crop production.

The Standard & Poor’s GSCI Spot Index rose for a fourth straight week as Chinese metal inventories plunged and droughts lingered in the Asian country and Europe, trimming prospects for wheat and cotton crops. The global recovery “is gaining strength,” the Group of Eight leaders said May 27 after a summit in Deauville, France. In the U.S., consumer sentiment rose to a three-month high in May, a private report showed last month.

“We are seeing a reasonable rate of growth in worldwide economic activity,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco. “The supply-demand associated with that growth, combined with a weaker dollar, probably explains the move into commodities.”

Copper prices have jumped 40 percent in the past year while wheat has surged 75 percent and corn has more than doubled amid increasing demand from China and other emerging economies. Raw materials have also gained as investors boosted holdings as an alternative to the dollar, which has slumped more than 6 percent this year against a six-currency basket.

$130 Million

Investors poured $130 million into commodity funds in the week ended June 1, the second straight increase, according to EPFR Global, a Cambridge, Massachusetts-based researcher. The previous week had inflows of $702.8 million.

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