Commodities investors are coming off of a sweet period when all they had to do to get a good return was to buy what China was buying. With China’s economy slowing down, investors are looking elsewhere than base metals, cotton, and soybeans—all of which heavily depend on Chinese demand.
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The US natural gas market is one area that is not affected by China’s economy. But the market has been so dominated by China, some investors are simply choosing to get out.
The strategy of buying aluminum, zinc, nickel, and steel along with the agricultural commodities that have enjoyed high Chinese demand. Commodities such as crude oil and gold are not affected as greatly because they comprise a much smaller share of the Chinese market.
There have been significant outflows from commodity funds that invested based on China’s previously high demand. Outflows of almost $6 billion over the first seven months of 2012 compare with inflows of $7.8 billion during the first seven months of 2011.
Investors continue to fear China’s economy will experience a hard landing
and that China’s government is not doing enough to stimulate growth.
China’s economy is large and is still growing but not nearly at the rate to which the markets had become accustomed. Commodities affected by exports have seen demand fall. Natural gas, crude oil, and gold are some commodities that have either have high demand outside of China or are less affected by China’s economic slowdown.
The double-digit growth rates China has become known for may be over. Since the China cycle seems to have turned—as all cycles do—investors may wish to look for better opportunities elsewhere.