Oil, gold to help ride out commodities headwinds

Crude oil and gold will lead a rally in commodities as production fails to keep pace with demand, said Ray Eyles, chief executive officer of JPMorgan Chase & Co (JPM)’s commodity business in Asia.

Oil supply will trail consumption in the second half as the Organization of Petroleum Exporting Countries and other producers won't increase output fast enough, the bank said in a report May 6. Rabobank Groep expects shortages in corn and cotton this year while Barclays Capital is predicting deficits in copper, nickel, tin, lead and platinum.

"Ultimately, the long-term fundamental supply and demand of commodities is still pointing to higher prices," Eyles said in an interview. "The commodities that have the best underlying fundamental stories at the moment" are in energy because of unrest in the West Asia and Japan's nuclear crisis.

Crude has more than tripled since December 2008 and gold doubled, with the Standard & Poor's GSCI Index of 24 commodities beating stocks, bonds and the dollar for five straight months through April, the longest run in at least 14 years. That kept global food costs near a record, prompting central banks from Brasilia to Beijing to raise interest rates and helping spur conflict and riots in West Asia and North Africa.

June-delivery oil traded at $98.56 a barrel on the New York Mercantile Exchange on Wednesday after the most active contract touched $114.83 this month, the highest level since 2008.

SUPPLY LIMITED
Precious metals will benefit the most from a "strong interest" in diversification and inflation and currency hedges, he said May 16. "What people tend to underestimate is how strong and how far the market can go when there is a limited supply to match a very heavy demand," he said. Gold stored in the bank's vault in Singapore is "rapidly increasing," he said.

Cash gold touched a record $1,577.57 an ounce on May 2 and is up 5.2 per cent this year after a 30 per cent rally in 2010.

The S&P GSCI Index slumped 11 per cent in the first week of May on signs of an economic slowdown after climbing 20 per cent through April and more than doubling since the start of 2009.

"In the short-term, the macro landscape seems to have taken a turn," said Eyles, referring to signs of a slowing global economy, China's monetary tightening and the European debt crisis. That's weighing on industrial metals, he said. Copper declined 6.7 per cent this year on the London Metal Exchange and zinc dropped 12 per cent.

INVESTOR DEMAND
Goldman Sachs Group Inc. in reports on April 11 and April 15 told investors to be "underweight" commodities in the next three to six months. The bank still expects commodities to advance about 10 per cent over the next 12 months.

JPMorgan, the second-biggest US bank by assets, has joined Citigroup Inc., Nomura Holdings Inc. and Australia & New Zealand Banking Group Ltd. in boosting staff and business in Asia to profit from investment and hedging demand.