Sovereign Wealth Funds Buying Up Gold, Other Commodities

Posted In: Asia, China, Commodities, Currencies, Diversification, Dollar, Energy, Foreign Investors, Gasoline, Global Economy, Gold, Middle East, Natural Resources, Oil, Russia, Sovereign Wealth Funds

No surprise here. Late Monday night the Financial Times (UK) reported:

State-owned sovereign wealth funds are beginning to diversify their investments into commodities, potentially having a significant impact on international raw material prices because of their immense resources.

Sovereign wealth funds, or SWFs, are investment vehicles backed by governments in the Middle East, China, Russia, and elsewhere. According to The Times (UK) from October 28:

Sovereign funds have been around since 1953, when the Kuwait Investment Authority (KIA) was established to benefit future generations of Kuwaitis when the oil stopped flowing. But it is only since the turn of the millennium that the power of sovereign funds has mushroomed. The rising price of oil and gas has prompted Middle East countries to look for new ways to invest their piles of cash. Russia has money to spare as energy prices have soared. At the same time, funds in Singapore, and more particularly China, have been boosted by income from huge trade surpluses.

The Financial Times is reporting that the total investment of SWFs in natural resources is still below 5% of their total allocations. Still, Katherine Spector, head of energy strategy at JPMorgan in New York, noted that, “While macro-data on sovereign money is elusive, anecdotally we see meaningful flows into commodities from the Middle East, Europe and Asia.” The Deutsche Bank said with worldwide state reserves above $3 trillion, any movement into the relatively small commodities markets could influence prices. The International Monetary Fund (IMF) estimates that total investments by sovereign funds have reached $2 trillion and are forecast to hit $12 trillion by 2012.

gold-bar.jpg

On the reasons for SWFs buying up commodities, a senior banker interviewed by the Financial Times said, “They want to use commodities, and particularly gold, as a hedge against the US dollar weakness,” adding that the investments were mainly streaming in from the Middle East and Asia. Another banker stated, “They want commodities exposure exactly for the same reason as other institutional investors- diversification.”

Sphere: Related Content