Investors were badly stung by commodities in 2008 but they have been quick to forgive and forget. According to Barclays Capital, inflows into the sector reached a new high of $7.9bn in October, taking total investor commodity holdings to a record $340bn.
Since the rally in risk assets started in August, commodity spot prices have risen by about 20 per cent and there is a case for worrying that this may be a crowded trade in the near term. But current investor holdings of commodities represent less than 0.5 per cent of global financial wealth, whereas portfolio optimisation techniques suggest that the “correct” share of wealth that should be allocated to commodities is in the order of 15-25 per cent. So there is an enormous distance to go before investing institutions are likely to be satiated with commodities.
Furthermore, this is the phase of the global economic cycle when commodity prices tend to rise most rapidly. The early stages of the rebound in world output had relatively little effect on commodity returns, largely because the responsiveness of supply proved greater than had been expected. Producers had substantially increased their capacity during the price boom of 2005-07, and this capacity was brought on stream as demand began to pick up. But the cushion of spare capacity has now largely been used up, so price pressures could be much greater if global commodity demand continues to expand rapidly.