Commodities Climb to Record, Led by Metals, as Equities Slump

By Millie Munshi

Jan. 8 (Bloomberg) -- Commodities jumped to a record on speculation that metals, energy and grains will outperform equity and bond markets this year.

The UBS Bloomberg Constant Maturity Commodity Index rose as much as 2.5 percent to 1,334.71, the highest ever. Copper surged to a seven-week high, gold soared to a record and energy prices rebounded. The commodity gauge climbed 22 percent last year, while the Standard & Poor's 500 Index rose 3.5 percent.

``It's all about what's going to be driving returns this year,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York. ``Commodities have performed well, and they're going to continue to perform well.''

Copper jumped 5 percent as inventories in China, the world's biggest metal consumer, tumbled to the lowest since Feb. 1. Crude oil rose more than $2 a barrel on speculation that a government report will show U.S. stockpiles fell for an eighth week. The S&P 500 was down as much as 0.4 percent today after tumbling 4.5 percent last week.

``Part of what's driving today's rally is the long-term picture for global demand,'' said William O'Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. ``But you can't dismiss the fact people are looking at alternative-asset classes and deciding commodities are the best place to put their money. There's nervousness about other financial markets.''

China, the world's fastest-growing major economy, expanded by almost 12 percent in the third quarter. Growth is set to continue as the country's trade surplus probably swelled to a record last month, according to economists surveyed by Bloomberg.

`Demand-Driven'

``There continues to be a demand-driven story in commodities,'' Flerlage of NuWave said. ``The only way that story is going to go away is if we see a significant global slowdown. China still has tons of spending and building to do.''

Copper futures for March delivery gained 15.75 cents to $3.2985 a pound on the Comex division of the New York Mercantile Exchange. Nickel surged as much as 6.4 percent in London.

Gold futures for February delivery rose $18.20, or 2.1 percent, to $880.20 an ounce at 1:29 p.m. on the Comex. Earlier, the price climbed to a record $884. Gold for immediate delivery reached $881.28, the highest ever.

Crude-oil futures for February delivery rose $2.05, or 2.2 percent, to $97.14 a barrel on the Nymex. Futures reached a record $100.09 a barrel on Jan. 3. Prices are up 73 percent from a year ago.

Soybeans, Sugar Rally

Soybeans extended a rally to the highest in 34 years, and soybean oil climbed to a record. Sugar gained to a one-year high, cocoa rose to the highest in almost five years and platinum jumped to a record.

Treasuries declined as two-year note yields near the lowest since 2004 discouraged investors from buying short-term U.S. government debt.

Some investors are buying raw materials as a hedge against inflation. Prices will continue to gain on speculation the Federal Reserve will lower U.S. borrowing costs this year, weakening the dollar, traders said.

``I don't see any relief to raging commodity prices until the Federal Reserve is done cutting interest rates,'' Ralph Preston, a strategist at Heritage West Financial Inc. in San Diego, said yesterday. Commodity prices will gain ``for years to come,'' he said.

Interest Rates

Interest-rate futures are showing a 100 percent chance the Fed will lower its benchmark rate by at least a quarter- percentage point at its next policy meeting on Jan. 30. The central bank lowered borrowing costs three times in 2007.

Some raw-material prices will gain this week as traders rebalance investments in commodity indexes, Flerlage of NuWave said. Investments in funds and other products tracking such indexes will rise to $150 billion this month from $110 billion last year, according to Standard & Poor's.

``Commodities are getting a lot of bullish momentum,'' said Adam Klopfenstein, a market strategist for Lind-Waldock in Chicago. ``There's a lot of global demand.''

Higher commmodity prices are boosting profits for producers including Freeport-McMoRan Copper & Gold Inc., the world's biggest publicly traded copper company and Exxon Mobil Corp., the largest oil producer.

To contact the reporter on the story: Millie Munshi in New York at mmunshi@bloomberg.net