Bullish analysts bet on commodities in 2012

Raw material prices are on pace to beat equities for the fifth consecutive year, underscoring the strength of demand from emerging economies, analysts say.

Stock exchanges around the world were rocked by political and economic volatility this year, as rapid gains were followed by huge losses. The finance sector, which helped drive overall growth during the boom years, was besieged by worries emanating from Europe and the continent's sovereign-debt crisis.

Though the stock market has historically outpaced gains in other sectors, raw materials have continued to gain in value over the past few years. The U.S. economy, along with those in Western Europe, has experienced only tepid growth, but the rapid expansion in countries such as Brazil, Russia, India and China (BRIC) has remained strong, helping to drive demand for commodities.

Bloomberg reports that the MSCI All-Country World Index of equities has fallen 13 percent this year. Moreover, yields of Treasuries also dropped as they touched record low levels. Standard & Poor's GSCI Index of 24 commodities, on the other hand, has climbed 2 percent. Analysts from Goldman Sachs - known for their accurate prognostications – project commodities to return roughly 15 percent over the next 12 months.

Demand from China will largely drive demand for commodities, according to economists and other experts. Many economists are betting the U.S. will experience moderate growth in 2012, and a growing number contend Western Europe could slip into another recession. However, demand from China could counteract the drop in demand from such countries, according to Wells Capital Management chief investment strategist James Paulsen.

"The odds favor that the emerging world has succeeded in producing a soft landing rather than a crash landing," he said. "A crash landing would make it more like 2008 for commodities, but a soft landing means we probably are in an ongoing recovery, which makes it very likely that commodities go onto new highs."

Copper demand, for example, is largely tied to economic activity and future growth prospects, as the metal is primarily used in construction and manufacturing. Copper prices have swung precipitously over the past few years, and values have eroded since February. Though short-term factors have contributed to the decline in copper prices, a number of experts remain bullish on future prospects.

Still, some experts asserted raw materials could decline in 2012 if Europe's sovereign debt crisis continues to spread to other countries. Economists worry if Greece defaults on its debt obligations – especially after European leaders have worked strenuously to prevent the Southern European nation from doing so – the effects could spark a global financial crisis.

Public officials and economists fear the continent's sovereign debt woes could send shockwaves through the global economy, triggering a panic much like the one prompted by the 2008 failure of Lehman Brothers.

Even amid such worries, analysts and investors are still eying commodities. Hedge funds and other large speculators are holding net-long positions on raw materials, according to Bloomberg, indicating that large investment houses are confident booming population growth and dwindling stockpiles will sustain high raw material prices.

On Monday at midday on the New York Mercantile Exchange, future contracts of gold, silver and copper also climbed higher. Gold futures were up 1.6 percent, while silver futures logged a 3.6 percent uptick. Copper futures for December delivery, meanwhile, jumped 2.7 percent.