Commodities Investment Almost Grinds to Halt in 2011

New investments in commodities almost ground to a halt last year, Barclays Capital said on Thursday, with inflows into the sector dropping almost 78 percent from 2010 to the lowest in nine years. 

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The move may indicate a shift in how investors are approaching the volatile asset class. Commodities saw an explosion in interest between 2005 and 2010, attracting the attention of critics and regulators who said the influx of cash may have played a role in inflating energy and food prices. 

New investments in commodities fell to $15 billion in 2011 compared with more than $140 billion that flowed into the sector in 2009-2010. Barclays said investments may rebound slightly this year but were unlikely to return to prior levels. 

"2011 was the weakest year for fresh inflows into commodities since 2002," Barclay's commodity analysts said in a note to clients. 

"Weakness of inflows was broad-based across different markets and sectors ... Even physically backed precious metal ETPs (exchange-traded products), a traditional financial hedge in times of uncertainty, saw less than half the inflows seen over the past couple of years." 

At the start of 2011, Barcap had estimated investments in the sector would continue to soar, hitting $420 billion or more. 

The bank said total commodity assets under management (AUM), which take account of price changes as well as fresh fund inflows, rose by $19 billion to $399 billion in 2011, the smallest year-on-year increase since 2003. 

Brent crude oil prices

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[LCOCV1  Loading...      ()] averaged more than $100 a barrel for the first time ever last year, while gold

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[XAU=  Loading...      ()] soared to a series of record highs above $1,900, before selling off in the last months of the year. 

Investor interest became particularly negative in December, which saw $7.7 billion of net withdrawals, with outflows from all commodity sectors. 

"AUM peaked at $418 billion by the end of the first quarter, and then fell after that," Barcap said. 

The data suggests investors turned negative on commodities after sharp sell-offs in May, such as the near 10 percent crash in oil prices on May 5. Subsequent violent sell-offs in August also dampened any chance of a rebound. 

AUM had soared by almost $77 billion in the first four months of the year, Barclays said, on a combination of strong inflows and rallying prices (over the same period in 2009 and 2010, AUM had increased by less than half that on average). 

But after that each quarter saw money pulled out of the sector, with AUM "declining for three consecutive quarters for the first time ever".  

Barclays said that if its forecasts for individual commodity markets this year are accurate, investors risk missing returns of around 10 percent for the main benchmark indexes this year, with precious and base metals leading the way. 

The bank said, however, that investors who remain interested in the sector are increasingly looking at more sophisticated strategies than 'buy-and-hold' indexes. 

"The current profile of our price forecast suggests precious metals will be the strongest sector in 2012, up by almost 20 percent in the six months to the end of Q2 and 21 percent on the year as a whole," the bank said. 

"Investment in commodities has matured and investors are increasingly driven not just by the desire to diversify portfolios but also due to market trends specific to commodities such as supply constraints and leverage to emerging market growth." 

Grains and oilseeds are the only commodities for which Barclays sees negative returns in 2012.