Commodity Watch

We still expect cyclical commodities to break out to the upside

We believe that near-to-medium term fundamentals remain most constructive for crude oil, copper, platinum and corn,

with short-term risk/reward looking the best for crude oil. We maintain an overweight recommendation to commodities

and a 19.0% 12-month forecasted return for the S&P GSCI Enhanced Total Returns Index.

Commodity price action in recent months has largely been differentiated by leverage to the economic cycle, with cyclical commodities such as oil and copper remaining stuck in trading ranges while less cyclical commodities such as gold and the grains have continued to set new highs for the year. Consequently, while gold and corn prices have moved up in line with our constructive views, oil and copper remain below our targets,awaiting a catalyst to break them out of their current trading ranges.

We continue to expect the less cyclical commodities to perform well. For gold, we maintain that the low US real interest rate environment will allow prices to continue to move higher, with a 6-month target of $1300/toz.

Further, we expect that a resumption of Quantitative Easing (QE) would likely accelerate the move to our 6-month price target and provide upside risk to our forecasts. For corn, although prices have moved in line with our 6-month forecast of $5.15/bu, and the high level of net speculative long positions in corn raises the downside risk to prices of a sell-off, we continue to see the balance of risks to our forecast as being to the upside, with possible further downgrades to consensus US corn yield estimates potentially able to generate another leg higher in prices.

For the more cyclical commodities, oil and copper, while continued indications of more supportive policy in the US and China, better macro data, and improving commodity data have pushed cyclical commodity prices higher within their respective trading ranges, we continue to expect them to break out to the upside in coming months. Driving this view are expectations that supportive policy shifts in China and the United States, on top of already exceptionally high levels of emerging market commodity demand, will lead to further tightening in commodity fundamentals.

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