Government-owned sovereign wealth funds have made plenty of news purchasing shares of beleaguered financial giants, such as Citigroup and Merrill Lynch.
But the funds, most of them run by Asian export giants and Arab oil states stuffed with cash, also are putting a chunk of their change into commodity markets, helping to fuel the record run-ups for everything from gold to oil.
The funds now allocate about 1 percent of their approximately $3 trillion in assets, or $30 billion, to commodities, experts say. And they expect that number to explode in coming years as such funds in Asia and the Mideast grow larger.
"We’ve seen more and more investments by sovereign wealth funds into commodities, like gold, and we’re still at an early stage,” Boris Shrayer, head of investor strategy for commodities at Morgan Stanley, told The Wall Street Journal.
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"As sovereign wealth funds get more sophisticated with their investment strategies, we expect more of these funds to move into commodities.”
To some extent the SWFs are simply recycling commodities money. Mideast sovereign funds, for example, are funded by their governments’ oil revenue. So they are taking that money and putting it back into commodity markets.
Abu Dhabi Investment Authority, the world’s largest such fund with an estimated $875 billion as of September, invests 5 percent to 10 percent of that amount in hedge funds and commodity trading advisors, according to Euromoney magazine.
"The model for the large sovereign funds is similar to that of the leading U.S. university endowment funds, such as Yale, Harvard and Princeton,” Richard Kushel, a managing director at Blackrock, a money management firm, told Euromoney.
"They were early adopters of absolute return strategies and placed much greater emphasis on alternatives [such as commodities] and less on short-dated liquid instruments,” such as bonds.
Mideast funds are especially keen on gold, as a hedge against inflation and the falling dollar. Those gold purchases have helped push the precious metal to recent record highs.
Sovereign funds have played a role in sending oil prices to new peaks as well. They are turning to commodities as a safe haven from the turmoil in financial assets, says T. Okoshi, an economist at Nomura Holdings.
"Petrodollars could very well be helping to prop up crude oil prices,” he wrote in a report cited by Bloomberg.
Of course, commodity investments could come back to bite the nations making them. For example, China is a huge consumer of commodities like oil, steel, coal and copper. If their own government investment fund pushs up prices of these goods, rising costs will contribute to China’s growing inflation problem.
Some critics also point out that many sovereign funds are secretive about their investments and could thus too easily manipulate markets. But Walter Lukken, acting chairman of the Commodity Futures Trading Commission, isn’t worried about their trading in U.S. markets.
"They are treated like any other participants in our markets,” Lukken said at the Reuters Regulation Summit this month. "If they become problematic, our systems are set up to find that out and to take action against it.”
© NewsMax 2008. All rights reserved.
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