Commodity Trade Alert

(Bloomberg) — A slump in commodities last week was caused by a strengthening dollar and raw materials remain “hot- ticket” investments for 2010, Morgan Stanley said.

The Reuters/Jefferies CRB Index of 19 raw materials fell to the lowest since October last week. The decline is a “buying opportunity,” Hussein Allidina, head of commodity research at Morgan Stanley, said at a sugar conference in Dubai today.

“The recent sell-off in commodities will pass,” he said. “It’s a general risk reduction and not the same that surrounded the Lehman collapse.”

Copper, sugar and lead prices doubled last year, helping raw materials post the biggest annual gain in four decades, as Chinese demand compensated for the slump in the world economy. The S&P GSCI Index of 24 materials jumped 50 percent in 2009, the most since at least 1971, and commodities drew record $60 billion in investments, according to Barclays Capital.

Growth in emerging markets and supply constraints will help boost commodity prices, Allidina said. Expansion of 6.5 percent in developing countries “augurs well” for oil demand, and the OPEC may need to raise output in second-half of 2010, he said.

Mohammad Ali Khatibi, Iran’s OPEC governor, said today the world oil supply is enough to meet demand during the first half of this year. The Organization of Petroleum Exporting Countries has left production levels unchanged since December 2008, when it announced the largest supply cut in the group’s history at a meeting in Algeria as world demand collapsed in the wake of the financial crisis. OPEC meets on March 17 to consider whether to alter supply targets.

Crude oil traded in New York will rise by the end of this year to $95 a barrel as demand recovers, Allidina said Jan. 25. Declining crude stockpiles and the improving global economy will boost prices and oil will average $100 in 2011, he said.

Oil for March delivery was at $71.46 a barrel, up 27 cents in after-hours on the New York Mercantile Exchange as of 7:15 p.m. Mumbai time. Futures tumbled to a seven-week low of $69.50 on Feb. 5. Full: http://is.gd/7Ymxo

(Dow Jones)–ETF Securities USA has filed with the U.S. Securities and Exchange Commission for permission to launch a U.S.-based exchange-traded fund backed by a basket of physical gold, silver, platinum and palladium.

If allowed to begin trading, the new fund may push up prices for the precious metals.  The filing, which was dated Friday, says the company proposes to create the ETFS Physical PM Basket Shares, to be issued through a trust.

“The investment objective of the trust is for the shares to reflect the performance of the prices of physical gold, silver, platinum and palladium, in the proportions held by the trust, less the trust’s expenses,” the filing says.

ETF Securities USA “believes that, for many investors, the shares will represent a cost-effective investment in bullion,” the filing says.

The precious metals held by the trust will be valued on the basis of London afternoon fixes for gold, platinum and palladium and by the silver fix at approximately noon London time.

The company expects that the shares will trade on the New York Stock Exchange Arca platform, the filing says.

“The shares are designed for investors who want a cost-effective and convenient way to invest in a basket of bullion with minimal credit risk,” the filing says.

The fund will track the spot price of the underlying metal minus management fees and is backed by physical bullion, meaning that physical metal is put into storage to back shares that trade like a stock but track the price of the commodity.

ETF Securities notes that since the fund will take metal off the market, it could cause bullion prices to rise, especially for the relatively small platinum and palladium market, where supply and demand constraints exist that are generally not present for gold and silver.

“Purchasing activity associated with acquiring the bullion required for deposit into the trust in connection with the creation of baskets may temporarily increase the market price of gold, silver, platinum and palladium, which will result in higher prices for the shares,” the filing says.

If the SEC declares the new fund effective, ETFS Physical PM Basket Shares would join the company’s four other U.S. physically backed precious metals exchange-traded funds.

Holdings in ETFS Physical Swiss Gold Shares (SGOL), ETFS Physical Silver Shares (SIVR), ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL) recently topped $1 billion.

The platinum and palladium funds began trading Jan. 8 on the NYSE Arca and were the first ETFs for the platinum group metals in the U.S. Since they began trading, some market participants have said that they have created price volatility in the platinum and palladium market.

ETF Securities launched the silver fund in July and the gold fund in September.  Full: http://online.wsj.com/article/BT-CO-20100208-715406.html?mod=WSJ_World_MIDDLEHeadlinesEurope

Did you read “The Greatest Trade Ever” ? Remember when it took quite some time for those subprime bets to work?  Remember when everyone including big name Wall Street Firms thought he was crazy?  Remember who stuck to his guns and ended up making $14 billion dollars for himself and his funds?  (Bloomberg) — Hedge-fund billionaire John Paulson’s gold fund lost 14 percent in January, its first month of operation, two investors said.

The fund invests in mining companies and bullion-related derivatives, according to the investors, who asked not to be named because the fund is private. Paulson’s $32 billion Paulson & Co., based in New York, bought gold companies in its other funds as well as bullion rose about 24 percent in 2009.

Gold futures fell to a three-month low of $1,044.50 in New York today as the dollar’s rally reduced demand for the precious metal as an alternative investment. Paulson, 54, is the largest investor in the fund with a $250 million personal stake, the people said. He started the fund as a long-term bet that gold will rise. Investors can’t exit the fund for three years.

Paulson earned an estimated $2 billion in 2008, according to Institutional Investor’s Alpha Magazine. His Credit Opportunities Fund soared almost sixfold in 2007 on bets that subprime mortgages, or loans made to homeowners with bad credit, would plummet. Full: http://www.businessweek.com/news/2010-02-05/john-paulson-gold-fund-said-to-tumble-14-in-its-first-month.html

(Dow Jones)–Canadian metals fund manager Bullion Management Group said Monday it has launched a new fund that invests exclusively in physical gold bullion, adding to investor outlets for the metal that continues to trade at historically elevated levels above $1,000 an ounce.

The BMG Gold BullionFund joins a growing number of products seeking to tap into investor interest in the metal, including the ETFS Physical Swiss Gold Shares (SGOL) exchange-traded fund that launched in July and the January-launched UBS E-TRACS S&P 500 Gold Hedged ETN, an exchange-trade note that tracks the S&P 500 Gold Hedged Index. There are now more than a dozen physically backed gold exchange-traded funds in the world.

The BMG Gold BullionFund is an open-end mutual fund trust that can be purchased and redeemed daily at net asset value. The fund does not use derivatives, futures, options or currency hedging, nor will it invest in gold certificates. Units of BMG Gold BullionFund cannot be borrowed for shorting.

“We want to avoid the inherent risk and costs associated with those types of activities,” BMG president and CEO Nick Barisheff said in a statement.

The gold-only fund is modeled after the Toronto-based company’s $290-million-Canadian-dollar BMG BullionFund, which invests in gold, silver and platinum bullion. Full: http://online.wsj.com/article/BT-CO-20100208-710872.html?mod=WSJ_latestheadlines

(FINalternatives) Commodities hedge fund Touradji Capital Management poured more than $50 million into steel companies in the fourth quarter, according to a regulatory filing.

The $2.7 billion New York-based firm moved to profit from the federal “Cash for Clunkers” car program, which forced automakers to increase their purchases of steel. Touradji bought $50.8 million worth of shares in four steel companies, including U.S. Steel and Steel Dynamics.

The hedge fund also bought nearly $10 million in XTO Energy shares, according to the filing. Full: http://www.finalternatives.com/node/11312

Nautical Capital Management LLC, an asset management company specializing in the development and management of diversified commodity portfolios, announced today the launch of its commodity-based absolute return strategies. The firm offers investors both systematic and discretionary absolute return and enhanced index strategies.

These commodity strategies, which are targeted to fund of funds, family offices, institutional investors and endowments, are intended to be the most diversified, comprehensive and tailored commodities funds offered anywhere in the world.

Commenting on the effort, David Henritze, CEO of Nautical Capital Management, said, “When you think of equities, you think of Fidelity, when you think of fixed income you think of Pimco and when you think of commodities we want investors to think of Nautical Capital Management. Our robust product suite allows institutional investors one stop shopping if they are interested in investing in this diverse asset class.”

Ryan Carrier, Chief Investment Officer of Nautical Capital Management added, “We work hard to help our clients find the right commodities products and solutions to help them fulfill their investment objectives. Our strategies are positioned to benefit from specific and liquid inefficiencies in the marketplace which can translate into great opportunities for our clients.”

Nautical Capital began managing partner capital in December and has already secured a $20 million commitment to launch two Exchange Traded Funds. The two products, scheduled for the second quarter of 2010, are listed hedge fund strategies systematically trading crude oil and natural gas.

About Nautical Capital Management:

Nautical Capital Management LLC is a private global commodities fund management company specializing in the trading of diversified commodity portfolios. With over 70 years of combined experience in the commodity asset class and investing, the firm offers superior structured product design, historical data analysis, commodity asset allocation analysis, quantitative modeling, managed funds, and strategic trade execution. Nautical specializes in tailored-made investment solutions for commodity asset allocators and absolute return seekers of all kinds. To learn more about Nautical visit www.NauticalCapital.com. Full article: http://is.gd/7Xu5H

(guardian.co.uk) Sir Richard Branson and fellow leading businessmen will warn ministers this week that the world is running out of oil and faces an oil crunch within five years. The founder of the Virgin group, whose rail, airline and travel companies are sensitive to energy prices, will say that the ­coming crisis could be even more serious than the credit crunch.

“The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well,” Branson will say.

“Our message to government and businesses is clear: act,” he says in a foreword to a new report on the crisis. “Don’t let the oil crunch catch us out in the way that the credit crunch did.”

Other British executives who will support the warning include Ian Marchant, chief executive of Scottish and Southern Energy group, and Brian Souter, chief executive of transport operator Stagecoach.

Their call for urgent government action comes amid a wider debate on the issue and follows allegations by insiders at the International Energy Agency that the organisation had deliberately underplayed the threat of so-called “peak oil” to avoid panic on the stock markets.

Ministers have until now refused to take predictions of oil droughts seriously, preferring to side with oil companies such as BP and ExxonMobil and crude producers such as the Saudis, who insist there is nothing to worry about.

But there are signs this is about to change, according to Jeremy Leggett, founder of the Solarcentury renewable power company and a member of a peak oil taskforce within the business community. “[We are] in regular contact with government; we have reason to believe their risk thinking on peak oil may be evolving away from BP et al’s and we await the results of further consultations with keen interest.”

The issue came up at the recent World Economic Forum in Davos where Thierry Desmarest, chief executive of the Total oil company in France, also broke ranks. The world could struggle to produce more than 95m barrels of oil a day in future, he said – 10% above present levels. “The problem of peak oil remains.”

Chris Skrebowski, an independent oil consultant who prepared parts of the peak oil report for Branson and others, said that only recession is holding back a crisis: “The next major supply constraint, along with spiking oil prices, will not occur until recession-hit demand grows to the point that it removes the current excess oil stocks and the large spare capacity held by Opec. However, once these are removed, possibly as early as 2012-13 and no later than 2014-15, oil prices are likely to spike, imperilling economic growth and causing economic dislocation.”

Skrebowski believes that Britain is particularly vulnerable because it has gone from being a net exporter of oil, gas and coal to being an importer, and is becoming increasingly exposed to competition for supplies.

“This is likely to put pressure on the UK balance of payments and in a world of floating exchange rates is also likely to put downward pressure on the valuation of sterling. In other words, the positive benefits to the valuation of the pound as a petrocurrency are now eroding,” he said.

The question of peak oil came to centre stage last November when a whistleblower told the Guardian the figures provided by the IEA – and used by the UK and US governments for much of their planning scenarios – were inaccurate.

“The IEA in 2005 was predicting that oil supplies could rise as high as 120m barrels a day by 2030, although it was forced to reduce this gradually to 116m and then 105m last year,” said the IEA source. “The 120m figure always was nonsense but even today’s number is much higher than can be justified and the IEA knows this.”

But Saudi Arabia launched a counter-strike at Davos, insisting the issue was overblown. “The concern about peak oil is behind us,” said Khalid al-Falih, chief executive of Saudi Aramco.

Tony Hayward, the BP chief executive, downplayed fears about dwindling supplies in an interview with the Guardian last week. Full: http://www.guardian.co.uk/business/2010/feb/07/branson-warns-peak-oil-close

Need proof the Chinese are piling into Gold? Here it is…only $2 Trillion more to diversify out out of fiat money…(Roubini Global Economics) CIC is heavily exposed to resources, especially metals and mining, consistent with the sector’s weight within China’s foreign assets. The share of gold alone is particularly noticeable. The CIC not only has stakes in gold producers like Anglogold Ashanti but also in the SPDR gold fund (GLD). The exposure U.S. traded energy equities is somewhat smaller. The CIC does of course have stakes in some foreign energy companies, but the bulk of China’s 2010 energy purchases were made by the China Development Bank which extended loans to several cash-strapped energy companies and countries. Excerpted from the RGEMonitor, Full: http://www.roubini.com/asia-monitor/258378/a_glimpse_inside_the_cic___s_portfolio

CIC, China Investment Corp., 13-F –

(OCBJ) Aliso Viejo-based Armored Wolf LLC, one of the county’s larger hedge fund managers, is getting a $40 million multiyear placement from a French investment company.

Armored Wolf, which opened in 2008 amid the worst of the financial crisis, is getting the cash from NewAlpha Asset Management, a unit of Paris-based OFI Asset Management , which man-ages about $30 billion in assets.

Cofounder John Brynjolfsson said he hopes the placement brings more attention to the young firm.

“When we talk to leading managers around the world, Orange County is seen as an attractive place to visit and invest,” he said. “We’re finding that this area has critical mass in terms of executives and leading money managers willing to make treks here to see us. That has been a definite plus in building a new hedge fund business.”

Brynjolfsson, a former longtime executive of Newport Beach-based Pacific Investments Management Co., said his hedge fund has now attracted about a dozen different institutional and wealthy investors.

It has more than $100 million in assets.

The fund’s strategy centers on tracking how inflationary or deflationary pressures impact world markets.

“We’re trying to adjust our portfolio on a monthly basis to take advantage of changes in markets,” Brynjolfsson said.

It invests primarily in commodities and inflation-linked bonds. Stocks and bonds from emerging markets are two other types of holdings in the fund.

“The emerging markets provide us with a lens on what is happening in the developed world in terms of inflation versus deflation,” Brynjolfsson said. “In particular, emerging markets are a gauge of raw material demand. The other half of the equation we look at is how policies by the Federal Reserve and central banks around the world are influencing markets.”

When the fund started in early 2008, it was mostly with money from family and friends.

Cofounder

It was cofounded by Ron Solberg, another former Pimco executive who at one time headed up emerging markets research at the unit of Germany’s Allianz SE. Full: http://www.ocbj.com/industry_article_pay.asp?aID=144634

Mr. Brynjolfsson oversees all investment activity at Armored Wolf, LLC. He is an expert in the area of managing alternative real assets; and his experience includes commodities, global inflation-linked bonds, event-linked catastrophe bonds, asset allocation and risk management.

A popular and provocative communicator, Mr. Brynjolfsson is a frequent guest on CNBC, Bloomberg TV and PBS’s Wealth Track; has been quoted in The New York Times and the Wall Street Journal and featured in Fortune; is a member of industry advisory committees; and has testified before the House Financial Services Committee as an expert on catastrophic risk transfer. Mr. Brynjolfsson is co-author of Inflation-Protection Bonds and co-editor of The Handbook of Inflation-Indexed Bonds. He has 19 years of investment experience and holds a bachelor’s degree in physics and mathematics from Columbia College and a master’s degree in finance and economics from the MIT Sloan School of Management.

During Mr. Brynjolfsson’s 19-year tenure at PIMCO, he launched and grew the Real Return platform from $0 to $80 billion in third-party assets, including launching and managing PIMCO’s second, third, and fourth largest public funds. He provided leadership for asset allocation, risk management and consulting functions. For more info on Armored Wolf:  www.armoredwolf.com

(Bloomberg) — Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, favors investments in emerging markets on expectations they’ll outpace developed economies in growth and wealth.

Brazilian sovereign bonds and Chinese yuan non-deliverable forwards are attractive, El-Erian, co-chief investment officer at Pacific Investment Management Co., said today in Sydney in a Bloomberg Television interview. Greece needs outside help as it tackles the European Union’s largest budget shortfall, he said.

Pimco portfolio managers are reducing their riskiest positions, said El-Erian, who shares his job title with Bill Gross. Debt strains in Greece, Portugal and Spain, along with the emphasis on non-developed markets, underscore Pimco’s view that 2010 will be a year of slower-than-average growth and a shrinking global role for the U.S. economy.

“We have been moving up in quality, which has meant certain sales of high-yield names,” said El-Erian, 51, who is also author of the book “When Markets Collide.” “We’ve been very selective on which sovereigns we are exposed to.”

The next six months will be healthy for the U.S. economy, though the expansion may slow after that, El-Erian said.

‘Big Difference’

The U.S. will be able to withstand investor aversion to sovereign risk better than other nations, El-Erian said at an earlier press conference today during his trip to Sydney for a Reserve Bank of Australia symposium.  “It makes a big difference if you are the reserve currency,” he told reporters at the press conference. “It makes a big difference if you are the provider of the deepest and most predictable financial markets.”

Gross’s $210 billion Total Return Fund handed investors a 15 percent gain in the past year, beating half of its competitors, according to data compiled by Bloomberg.  The company, based in Newport Beach, California, has about $1 trillion in assets under management. It is a unit of Munich- based insurer Allianz SE.

Brazil is poised to be Latin America’s first major country to raise borrowing costs after leading the region out of the global recession last year, according to Bloomberg News surveys of economists.

Pimco prefers Brazilian debt over that from “much of the G-7” countries in part because of the central bank’s “hawkish” inflation stance, Michael Gomez, a co-head of emerging markets, said in a Feb. 4 interview.

Loosen Controls

China will loosen currency controls in 2010 and allow the yuan to strengthen, Gomez said in a separate interview Dec. 10. International investors use forwards, agreements to buy and sell assets at current prices for delivery at a future specified time and date, to bet on the yuan. Non-deliverable contracts are settled in dollars.

China’s economy will expand 6 percent or more in the coming years, El-Erian said in today’s press conference.

Greece is trying to persuade financial markets it can restrain its budget shortfall without outside assistance, while borrowing costs are also climbing for Portugal and Spain. Credit-default swaps on the debt of all three countries rose to records last week, increasing demand for the relative safety of U.S. government securities.

Credit-default swaps are contracts designed to protect against or speculate on default.

Seven-Week Low

Ten-year Treasury yields fell to 3.53 percent on Feb. 5, the lowest in seven weeks. The 3.375 percent security due November 2019 yielded 3.60 percent as of 8:47 a.m. in London.

“As the sovereign risk moves out, it will have an impact on adjacent products,” El-Erian said at the press conference. “We have been selling certain corporates that we simply believe are too rich for this environment.”

The comments reiterate those from Paul McCulley, a member of the Pimco investment committee, who wrote in a report last month that the company is reducing risk.  Pimco calls its forecast for an extended period of lower- than-average economic growth the “new normal.”

The extra yield investors demand to own corporate debt instead of government bonds widened four basis points last week to 169 basis points, the most since the period ended Nov. 27, according to the Bank of America Merrill Lynch Global Broad Market Corporate Index.

Greece, which had the European Union’s widest budget deficit at 12.7 percent of output last year, has struggled to convince investors it can bring the budget shortfall within the bloc’s limit of 3 percent.  Full: http://www.bloomberg.com/apps/news?pid=20601087&sid=aCOeVAK9L1EE&pos=7