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Jessica Cross, VM Group
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Global context for commodity fund-buying
Jessica Cross, CEO, VM Group
Posted: Fri, 21 Sep 2007

[miningmx.com] -- WHAT kind of world are we living in where the price of nickel can rise 12% in a day – as it did on the LME on Wednesday September 19? Not long ago that kind of rise might be regarded as quite decent over a year.

So what happened? Nothing special really by way of news that day. A few stainless steel producers have been talking about how they might start buying more nickel again. But if all it takes to get speculative buyers excited is a few rumblings like that, we are living in very odd times.

Consequently investment money is still sloshing around in vast quantities in commodities, and for some very sound underlying reasons. It’s not just the old China factor – rapidly expanding urbanisation. The same is happening in India, Brazil and other big economies where the game today is catching up with already well-developed countries.

Demand for lots of commodities, in some base metals, some agricultural products, and energy, is growing at an unprecedented pace in newly emerging economies.

The supply-side lag in commodities is profound. In base metals lack of investment in the mining industry has made itself felt across most base metals, tipping them into steep and prolonged backwardation. Research we have commissioned suggests that primary supply projections are currently considerably overstating the reality of how the miners are able to respond to these tight markets.

This revolution in commodity demand and potentially serious shortfall in supply is grist to the mill of a wide range of investors – hedge funds, mutual funds, pension funds and private individuals.

Commodities have weathered the recent credit crisis far better those most other investments. Largely because of uncertainty over whether or not slowly growing (and frequently interrupted) supply is going to be enough to cope with strongly growing (and rarely interrupted) demand.

In addition, the end of the Cold War era has resulted not in brotherly love and harmony, but a situation where geo-political uncertainty and a heightened sense of insecurity exists more everywhere.

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Russia is increasingly cause for concern; we have a Middle East ruled by autocrats desperately trying to stave off the rising tide of fundamentalist challenge; a Europe that is only nominally united; a USA brought low by its own wilful determination to use muscle over diplomacy; and a China that is quietly but steadily buying up the world’s resources wherever it can.

The world’s global currency – the US dollar – is getting cheaper by the day as the US Federal Reserve fights a rearguard action against its own consumer credit bubble. Inflation is just around the corner – oil at $100/barrel was laughed at a couple of years ago. And lastly of course there is climate change.

Eventually some of this background noise will interact to slow the whole growth game down. Until then, investment money will continue to flow into commodities.

Jessica Cross is CEO of VM Group, a UK-based commodities markets research house founded in 1997. In a career that spans about 20 years, Cross has worked as an precious metals commodity analyst for Anglo American, Consolidated Gold Fields and RTZ. She has a doctorate in financial engineering.