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Stay On the Commodities Highway

By Frank Holmes, CEO and Chief Investment Officer

NEW YORK (U.S. Global Investors) -- When it comes to investing, wise managers are like good drivers: constantly evaluating the environment, looking for signs to step on the gas or slow down. A positive signal recently came from Goldman Sachs, when the firm recommended "stepping back into the markets" in its latest Commodity Watch. Goldman is anticipating a 29% return for the S&P GSCI Enhanced Commodity Index over the next 12 months and suggests investors might want to increase their positions in commodities.

Cautious investors might note that this is a significant change compared to the storm we've been driving through over the past several months. Goldman bases its view on a number of compelling factors that reveal improved conditions:

1. Prices have been pushed below fair value. Commodities have underperformed all other assets, says Goldman. The U.S. Global investment team tracks numerous resource subsectors' daily movements, and looking over the past 60 days, the Morgan Stanley Commodity-Related Equity Index, as well as oil and gas, fertilizers, construction and engineering subsectors, have experience double-digit declines, triggering a -1 sigma move. This is a sign that several commodities indices may be oversold; historically, these dips provided buying opportunities.

2. China and the U.S. have been posting improved data. Forward-looking survey data for U.S. is more positive and China's activity measures have been "in line with expectations," says Goldman.

3. Policymakers are taking accommodative action. Recently, we've seen China cut interest rates for the first time since 2008. Australia and Brazil also cut rates, and Indonesia just introduced a stimulus plan to boost consumption and infrastructure spending, using $2.5 billion from the budget surplus to fund building projects as well as lift the tax-free annual income level, reports Bloomberg Businessweek. Some speculate that the U.S. might be next in making an easing move.

Central banks will do their best to provide liquidity to the banking system, says BCA Research. Recently, the Bank of England's central bank has "taken the lead," with total assets significantly accelerating after coming out with its own long-term refinancing operation (LTRO) program. England will provide six-month loans, as well as loans that are below market rates, to banks for many years, to help drive lending to households and businesses.

Don't Miss the Entrance Ramp

Many institutional managers have exited the commodities superhighway in favor of cash -- currently at the third-highest level on record -- or technology stocks. In its global fund manager survey this month, Bank of America-Merrill Lynch found that advisors' allocation to commodities reached its lowest level since February 2009.

Instead of commodities, global managers are favoring technology. BofA-ML calls tech "the most loved sector by far," with managers' overweighting the sector an average of more than 40%. On the opposite side of the scale are basic materials and utilities sectors.

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