Citi: 2013 Is ‘End Of The Commodities Supercycle’

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Tuesday May 21, 2013 12:57 PM

(Kitco News) - A slower-growing Chinese economy, lack of correlation between equities and commodities, and a stronger U.S. dollar are marking the "end of the commodities supercycle," said Citi in a research note on Tuesday.

"Citi expects 2013 to be the year in which the death bells ring for the commodity supercycle after its duly noted sunset, ushering in a new decade of opportunities based on how individual commodities will perform against one another and against broader market indicators such as equities or currencies. It will be a period of focus on unique individual commodity cycles and new relations emerging between and among commodities and other asset classes from fixed income to foreign exchange to global equities," they said.

The firm said gold has lost "investment glitter" as investors seek higher returns in other investments and inflation fears are further postponed. "As fears of inflation driven by global QE (quantitative easing) recede, for the time being, so should the gold price. Our current projections are for gold price to average $1,555/oz in 2013 and $1,435/oz in 2014," they said.

For gold, the outlook for the U.S. is key, as the market seems to be unmoved by concerns over Europe's economic woes and asset purchases by Japan, they said.

In general for commodities, Citi said it forecast China's economic growth to continue, but at a slower rate. Its new growth will be less focused on infrastructure and urbanization, and more on domestic consumption than investment. That will pressure industrial metals and bulk commodities, they said, with a less impact on energy demand.

The firm also said the correlation between commodities and equities is returning to normal as the action in two sectors splinters.

Citi is also longer-term bullish on the U.S. dollar and since commodities are dollar-denominated, that will impact the resource market as a whole. "But to the degree that commodity-producing countries depend on specific commodity exports, differentiated conditions should impact the FX values of different commodity currencies in varied ways as well, providing further opportunities for investors," they said.

Commodities will likely return to being valued on their specific supply and demand fundamentals, rather than having general factors affect all the raw materials, at least for the next few years, they said.

Specifically for the metals, the firm said returns in the mining sector have peaked and value in use, rather than intensity of use, means price gains are capped.

"In the decade ahead, we believe investors will need to gain a greater understanding of demand conditions. Shifts in underlying investment patterns in China and other emerging markets are a critical source of change for aggregate consumption as China and other EM growth shifts from more commodity-intensive fixed asset investments and industrial production growth to household-based and service sector growth. But policies are likely to move in the same direction as subsidies for food and fuel come under fiscal pressures and as environmental policies play a role," they said.

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By Debbie Carlson of Kitco News

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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