Commodity Index Returns to Decline in 2008, Commerzbank Says (ZT

By Saijel Kishan

Dec. 11 (Bloomberg) -- Commodity index returns may decline next year as a slowing U.S. economy dents demand for energy and metals, according to Commerzbank AG.

The Standard & Poor's Goldman Sachs Commodity Index, which has returned 25 percent this year, may lose investors 5 percent in 2008, said Eugen Weinberg, a commodities analyst at Frankfurt-based Commerzbank. The Dow Jones AIG Commodity Index, which has returned 12 percent, may be unchanged or return 5 percent, he said. The GSCI tends to be more heavily weighted toward oil.

Crude oil has fallen about 10 percent from a record last month on concern that stalling growth in the U.S. will cut demand from the world's biggest oil user. The London Metal Exchange Index of six contracts is heading for its first annual loss since 2001 as a slump in U.S. housing curbs demand for industrial metals.

``We still haven't seen the full extent of the downturn in the U.S. housing market,'' Weinberg said in a telephone interview. ``It's not a good picture for 2008; the broader indices are unlikely to match this year's performance.''

Commodities are outperforming stocks and bonds this year after supply shortages and rising demand from Asian economies pushed wheat and lead to all-time highs and oil close to $100 a barrel. The Deutsche Bank Liquid Commodity Index, the best performer, has returned 34 percent this year.

Investments in funds and products tracking commodity indexes will rise to $150 billion in January from $110 billion this year, Standard & Poor's said Nov. 1. Funds that follow such indexes allow investors to replicate the gains and declines in the prices of a selection of commodities without owning them.

Outflow Concern

Next year's possible decline in some indexes may slow investment growth, Weinberg said.

``If investors start fleeing commodities, the outflows could result in dramatic price falls,'' he said.

A potential production increase by the Organization of Petroleum Exporting Countries next year may reduce gains generated by the so-called backwardation in the oil market, Weinberg said.

A market is in backwardation when prices for commodities close to delivery are more expensive than those further in the future. Investors are able to make money in such as situation when they renew their monthly futures contracts.

Most metals markets next year will remain in the opposite situation, known as contango, curbing returns from indexes, Weinberg said.

``Metals demand will remain robust but that will be in the face of production increases,'' he said.

The Standard & Poor's 500 Index of stocks has gained 6.9 percent this year. U.S. Treasuries have returned 8 percent, according to Merrill Lynch & Co. indexes.

To contact the reporter on this story: Saijel Kishan in London at [email protected]