Commodity investing: Cautiously optimistic

The latest quarterly economic outlook from Barclays Capital includes a relatively upbeat chapter on commodities. As the strategists summarise:

Whilst the global economy still faces major uncertainties, the growth outlook for the remainder of 2010 looks reasonably benign, fundamentals are improving steadily in many individual commodity sectors and market participants may be underestimating the potential for significant price gains in Q4.

In highlighting the “nervous drivers” of demand among commodity investors, BarCap notes that August saw the first net outflow of funds from commodities since the bank started tracking these flows in 2009. Gold, however, bucked this trend; it has accounted for around a third of the US$29bn in commodity inflows so far this year. This, in itself, reflects the unease over the economic outlook that drove investors to trim exposure to other commodities. Although BarCap expects this anxiety to become less acute and overall commodity demand to recover in the fourth quarter, “the path ahead is likely to prove bumpy”.

Carbon markets: Trading up

The global carbon market is fast expanding. More than 8 gigatonnes of CO₂-equivalent changed hands last year, up nearly 70% on the previous year’s volume, according to a report released today by Point Carbon.

The value of carbon trading, however, was little changed; €94bn in 2009 versus €92bn in 2008. The weighted-average price of an emissions-reduction credit in the European Union, by far the world’s largest carbon trading venue, fell by more than 40% in 2009.

Futures predict gradually rising prices in the years ahead but exchanges will be more concerned with volumes. Recent history should give them reason to be optimistic.

Gold price: All that glitters

At odds with the fundamentals, the gold price continues to climb. Setting all-time nominal records after gaining around 30% so far this year, the EIU has upped its forecast for gold in 2010 and 2011. This is despite estimated growth in supply of 11% and a decline in demand of 14% this year. A story at the blog’s parent site explains the revised forecast: “High prices have proven self-reinforcing, encouraging investors to bet on further rises” [subscription required].

The Buttonwood columnist at The Economist argues that recent events around gold fulfil most of the preconditions for a bubble. But unlike the stock market, Buttonwood writes, gold’s lack of earnings or yield make it difficult to judge value relative to historical averages. (For what it’s worth, the current price is only around half of the metal’s inflation-adjusted high, US$2400, set in 1980.)

If some permanent loss of faith in the dollar is possible, gold will remain resilient as investors and central banks diversify their holdings. The spectre of stimulus-fuelled inflation in the US is also supportive of bullion. Mix in some speculative froth, and the gold price seems likely to remain elevated in the coming years. The EIU now anticipates an average gold price of US$1,186 per troy ounce in 2010, up from a previous forecast of US$1,044.