Investment funds still eye metals, CRU commodity study reveals

The investment funds that piled into aluminum, copper and other metals between late 1993 and early 1995 are here to stay, according to a study by CRU International, a business consultant in metals and minerals.

The study, entitled Aluminum Price Volatility: The Role of Funds, Derivatives and other “Non-Fundamentals,” estimates that the three main types of investors — commodity trading advisers, hedge funds and institutional investors — put almost $10 billion into base metal markets in 1994, creating an exposure of $17 billion and accounting for about 15% of London Metal Exchange turnover.

About 25% of this money was allocated to the aluminum market, and even more to the copper market. The hedge funds, which had the biggest impact on prices, withdrew in February of this year because of the downturn in the U.S. economy.

CRU believes that, at the price peak in early 1995, fund activity and other “non-fundamentals” added $600 per tonne to aluminum prices.

But the story does not end there. According to CRU, the commodity-trading advisers and institutions will remain in the market, and the funds under their management will also be back. They are fundamental traders, CRU says, and will reinforce any fundamental upswing or downswing in prices.

CRU points out that if U.S. funds alone allocated 7.5% of their capital to commodities (as some financial institutions have advised), $118 billion would find its way into base metal markets.