Goldman Sees Bull Run Over as Returns Trail Stocks: Commodities – Bloomberg

Commodities are trailing equities for the longest stretch in almost 15 years as Goldman Sachs Group Inc. and Citigroup Inc. predict the end of the decade-long bull market even as the global economy expands.

The Standard & Poor’s GSCI Spot Index of 24 commodities lagged behind the MSCI All-Country World Index for six months, the longest stretch since 1998. Hedge funds cut combined bullish bets across 18 U.S. raw-material futures by 51 percent from a 16-month high in September and are bearish on six of them. Commodities will return 1.6 percent in a year as losses in agriculture and precious metals diminish gains from energy and industrial metals, Goldman said last month.

Enlarge image Goldman Sees Bull Run Over as Returns Trail Stocks

Corn grows in a field in Tiskilwa, Illinois. Photographer: Daniel Acker/Bloomberg

Blankfein Most Afraid of `Deflationary Period' 22:26

May 2 (Bloomberg) — Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., talks about the U.S. economy, Federal Reserve monetary policy and the European financial crisis. He speaks with Investment Company Institute’s Paul Schott Stevens in Washington. (Excerpt. Source: Bloomberg)

Investors pulled a record $23.3 billion from commodity funds this year as global equities attracted $182 billion, according to EPFR Global, which tracks money flows. Prices that more than doubled in 10 years spurred expansions at mines, farms and oil fields. Gluts are emerging as the International Monetary Fund predicts global growth of 3.3 percent this year, from 3.2 percent in 2012. The group cut last week its estimates for China, the top consumer of metals, grains and energy.

“There are times when you probably should be avoiding commodities, and I think this is one of them,” said John Stephenson, who helps oversee about C$2.7 billion ($2.61 billion) at First Asset Investment Management Inc. in Toronto. “Anytime you have a whole lot of inventory and visible supply, prices are going to be under pressure. The real issue for commodities is the source of demand, China, is weak.”

Natural Gas

The S&P GSCI dropped 3.1 percent this year, as 17 members of the gauge retreated. Silver led the decline, falling 26 percent. Corn and gold also entered bear markets in April, joining copper, sugar, wheat, soybeans and coffee. Natural gas is leading the gainers with a 17 percent advance, while cotton rose 11 percent. The commodity index is 30 percent below its record close in July 2008.

The MSCI equity gauge gained 6.3 percent since the end of December, with the Dow Jones Industrial Average and the S&P 500 Index reaching records last month. The dollar strengthened 3.2 percent against six major trading partners. Global bonds measured by the Bank of America Merrill Lynch Global Broad Market Index lost 1.5 percent in May, the most since April 2004.

Commodities are diverging from equities as the supercycle, or longer-than-average period of rising prices, is eclipsed by the supply surge, Jeffrey Currie, Goldman’s head of commodities research in New York, wrote in a report May 14. The agricultural segment of the S&P GSCI will drop 13 percent in 12 months as livestock and precious metals lose 4 percent, he said. Energy and industrial metals will advance 5 percent.

Domestic Consumption

Most commodities will drop this year as China’s economy moves from a focus on infrastructure to domestic consumption and services, Citigroup’s Ed Morse said in a May 20 report. That means investors should pay more attention to supply and demand rather than just broad economic trends, he said. The bank predicted the end of the supercycle in November. UBS AG and Credit Suisse Group AG made similar forecasts this year.

The S&P GSCI more than tripled since the end of 1999, including 11 gains over the past 13 years, setting records in everything from oil to gold to copper. Producers struggled to keep up as China’s economy expanded more than fivefold. That attracted a surge of investment and assets under management totaled $409 billion in March, from $154 billion at the end of 2008, Barclays Plc estimates.

Corn Supply

Pessimism about commodities is focusing on the price of raw materials as the pace of growth in consumption slows. China will use 5.2 percent more copper this year, from a gain of 6.8 percent in 2012, Barclays estimates. The nation is still using enough copper in cables each month to circle the globe almost 90 times, government data show. It will consume more than one in every five tons of global corn supply this year as its hog herd reaches 447 million animals, six times the U.S. figure.

In the U.S., where builders use about 400 pounds of copper in a single-family home, sales of new properties in April reached the second-fastest pace since July 2008. Central banks in the U.S., Europe and Asia are still printing unprecedented amounts of money to boost growth, adding to the almost doubling of global sovereign debt to $23 trillion since the end of 2008, a Bank of America index shows.

Biggest Exporter

Supply expansions may fall short of forecasts as bad weather curbs crops in the U.S., the biggest exporter, and mining is disrupted. Farmers in Iowa, the largest U.S. corn and soybean grower, had their wettest April and May in records going back to 1873. Freeport-McMoRan Copper & Gold Inc.’s Grasberg operation may be shut for as long as three months after a tunnel collapsed last month. The Indonesian mine is the biggest source of copper after Escondida in Chile, where port strikes have disrupted metal shipments.

“The outlook for commodities is likely to be brighter,” said Alan Gayle, a senior strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees about $48 billion of assets. “The outlook will turn bullish when demand starts moving higher. I’m not jumping in yet with both feet and am going to let the story develop first, which I expect to happen over the next few months.”

The International Monetary Fund cut its forecast for Chinese growth this year and next on May 29. It’s now predicting 7.75 percent, from an earlier projection of 8 percent for 2013 and 8.2 percent for 2014. The U.S. economy grew at a 2.4 percent annualized rate in the first quarter, the Commerce Department said May 30, cutting its previous estimate of 2.5 percent.

Largest Retailer

Cheaper raw materials may boost margins for companies from McDonald’s Corp. to General Mills Inc. to Boeing Co., while keeping inflation in check and allowing the Federal Reserve to continue stimulus. Kraft Foods Group Inc. cut the cost of its Gevalia coffee by 6 percent last month and Wal-Mart Stores Inc., the world’s largest retailer, is reducing grocery prices. U.S. retail gasoline fell 4.5 percent from this year’s peak in February, American Automobile Association data show.

Hedge funds and other large speculators are holding a net-long position of 652,708 futures and options across 18 U.S. commodities, from 1.3 million in September, government data show. Supply will exceed demand for 12 of 18 of the metals and agricultural products, according to estimates from Barclays and Rabobank International.

West Texas Intermediate crude oil will average $90 a barrel this year, from $94.15 in 2012, Citigroup estimates. U.S. inventories reached the highest since 1931 on May 24, government data show. New drilling technology is unlocking supplies trapped in shale formations, helping the U.S. meet the highest proportion of its own energy needs since 1986. Crude rose 2.7 percent in New York trading this year.

Exchange Traded

Gold dropped 17 percent, the worst start to a year since 1982. Holdings through exchange-traded products tumbled 19 percent to the lowest since May 2011. Bullion will drop this year for the first time since 2000, according to a Bloomberg survey of 38 analysts.

The LMEX index of six industrial metals fell 6.3 percent. Copper stockpiles tracked by exchanges in London, Shanghai and New York more than doubled in the past year. Production will outpace demand for the first time in four years in 2013, Morgan Stanley predicts. Prices will decline about 6 percent in 12 months, Goldman estimates.

Farmers around the world will harvest the biggest grain and soybean crops ever, the U.S. Department of Agriculture estimates. Corn will extend this year’s 22 percent decline by another 3.2 percent in six months, as wheat drops 11 percent, Goldman says.

“You have the combination of higher production together with slower growth in China,” said Adrian Day, who manages about $135 million of assets as the president of Adrian Day Asset Management in Annapolis, Maryland. “For rest of the year, you have a potential surplus of production over demand, which obviously means lower prices.”

To contact the reporters on this story: Elizabeth Campbell in Chicago at ecampbell14; Joe Richter in New York at jrichter1; Debarati Roy in New York at droy5

To contact the editor responsible for this story: Steve Stroth at sstroth