Commodity markets enjoyed an extraordinary start to 2008 with prices for gold, platinum, crude oil, heating oil, gasoline, palm oil, rapeseed and rice all reaching record levels this week, helped by new investment flows at the start of the new year.
Commodities comfortably outperformed global equities and bonds last year and pensions funds and asset managers are expected to increase their allocations to the asset class in 2008.
Market talk suggested that between $1bn and $5bn of new investment money could flow into commodities at the beginning of the new year.
Oil breached the key $100 level, setting a record of $100.09 a barrel on Thursday and stealing the spotlight from gold, which surged beyond its previous record of $850 set in January 1980.
“$100 oil may not be sustainable, but it is not a purely speculative phenomenon,” said Adam Sieminski of Deutsche Bank.
“We expect oil prices will head back towards $80 a barrel in 2008-09, as some partial equilibrium comes back into the oil markets.
“However, geopolitical risks, tight fundamental market conditions and investor preferences for commodity assets all suggest that upside pressures remain.”
Nymex February West Texas Intermediate fell $1.68 to $97.50 a barrel Friday, while ICE February Brent lost 88 cents to $96.72 as disappointing US employment data fuelled fears over the possibility of a US recession in 2008.
Prices for agricultural commodities remain well below their inflation-adjusted peaks and, due to their growing importance in bio-energy production, their attractive valuations have been strengthened by record oil prices.
In Chicago, CBOT March wheat slipped 18 cents to $9.27 a bushel, up 4.7 per cent since January 1, while CBOT March corn was fractionally higher at $4.66½ a bushel, up 2.4 per cent this year.
Hot, dry weather is affecting this year’s corn crop in Argentina, the world’s second-largest exporter. Government forecasts suggested Argentina could produce 22.5m tones of corn this year, but rain is needed urgently in key growing areas.
Soyabean prices have also gained support from concerns about dry weather affecting Argentine production. CBOT January soyabeans slipped 8 cents to $12.43½ a bushel Friday, gaining 3.7 per cent so far this year.
Gold hit a record $869.05 a troy ounce on Thursday, supported by safe-haven buying following the assassination of Benazir Bhutto, dollar weakness and inflation fears. Gold reached a session high of $868.50 Friday before easing back to $857.60, up 2.9 per cent since the start of the year.
For base metals, trading volumes on the London Metal Exchange set a record for a third year in succession in 2007 with about 93m lots traded, an increase of almost 7 per cent on the previous year.