Hedge funds increased wagers on rising commodity prices to the most in two months and the rally in raw materials accelerated as the Federal Reserve pledged to keep borrowing costs low for three more years.

Money managers raised combined bullish positions across 18 U.S. futures and options by 13 percent to 742,902 contracts in the week ended Jan. 24, Commodity Futures Trading Commission data show. The so-called net-long position in copper jumped 53 percent to the highest since August and in silver by 22 percent to the most since September. Speculators also expanded bullish bets in sugar, soybeans, cotton, gold, gasoline and crude oil.

Fed policy makers said Jan. 25 they will keep their target interest rate for overnight loans between banks near zero at least until late 2014 and didn’t rule out buying more bonds. The Fed first pushed rates to a record low in December 2008 and has since purchased $2.3 trillion of debt in two rounds of so-called quantitative easing that ended in June 2011. During that period, commodities rose more than 80 percent. The Standard & Poor’s GSCI Spot Index of 24 raw materials jumped 2.2 percent last week, after a 0.1 percent gain a week earlier, as the dollar depreciated to a seven-week low.

“Every time the Fed sends the signal to the markets that there’s going to be a continued easy monetary stance, through time you tend to see more interest in real assets,” said Osvaldo Canavosio, the New York-based head of emerging markets and commodities research at Man Investments’ fund of funds division, which manages about $11.2 billion of assets. “Pretty much everything across the board denominated in dollars is going up in price because the dollar is coming down.”

Quarter Century

The S&P GSCI gauge rose 3.4 percent since the end of 2011. The MSCI All-Country World Index of equities gained 6.1 percent, its best start to a year in almost a quarter century. The U.S. Dollar Index, a measure against six trading partners, slid 1.6 percent to the lowest since Dec. 9. Treasuries lost less than 0.1 percent, a Bank of America Corp. index shows.

Twenty-one of the 24 raw materials tracked by S&P climbed last week, led by a 14 percent rally in natural gas. Copper rose 3.8 percent for a third weekly gain, the longest stretch since July. Gold advanced 4.3 percent, the most since late October, and cattle futures touched a record on Jan. 25.

The S&P GSCI surged 91 percent since the start of 2009 as mounting concern that low U.S. borrowing costs would stoke inflation drove investors to buy commodities as a hedge. Raw- material prices measured on a total return basis fell for the first time in three years in 2011 on signs that inflation was being contained as the expansion weakened.

European Risk

Commodities gained last week even after the International Monetary Fund cut its forecast for global growth this year to 3.3 percent, from a September forecast of 4 percent, warning that the European debt crisis threatens to derail the world economy. The U.S. expanded at a 2.8 percent annual pace in the fourth quarter, slower than forecast while still the fastest in more than a year, the government said Jan. 27.

Central bankers “are moving toward a loosening cycle rather than a tightening cycle, and that factor tends to favor hard assets and commodities,” said Evan Smith, who helps manage $650 million of assets at U.S. Global Investors Inc. in San Antonio. “The U.S. looks really quite good compared to the rest of the developed world.”

Funds pulled $345 million out of commodities in the week ended Jan. 25, according to Cambridge, Massachusetts-based EPFR Global, which tracks investment flows. In December, commodity- investment net-outflows totaled $7.7 billion, the first drop in three months, Barclays Capital said on Jan. 26.

Goldman Outlook

Goldman Sachs Group Inc. lowered forecasts for copper and nickel on Jan. 16 on prospects for increased supplies. The bank expects raw materials to rally 15 percent in the next year because of an improving outlook in the U.S. and Asia, Jeffrey Currie, the London-based head of commodities research, said in a report Jan. 13.

Investors lifted copper wagers by 2,546 contracts to 7,321, the CFTC data show. That’s the highest since the week ended Aug. 9. Funds turned bullish in the week ended Jan. 17 after betting on lower prices for 17 consecutive weeks. Demand outpaced production for a third month in October, the Lisbon-based International Copper Study Group said Jan. 23.

A measure of 11 U.S. farm goods showed speculators increased wagers on higher agricultural prices by 14 percent to 358,654 contracts, the biggest gain in three weeks. The bets jumped 77 percent since reaching a 33-month low in December.

Shrinking Cattle Herd

Bullish cattle holdings climbed 14 percent to 76,551 contacts, the largest jump since October. The U.S. herd declined to the lowest in 60 years after a drought in the South scorched pastures, prompting ranchers to slaughter animals as feed costs rose, the U.S. Department of Agriculturesaid Jan. 27.

Cattle prices rallied 16 percent since June 30 as Texas, the biggest producing state, had its driest year on record, according to John Nielsen-Gammon, the state climatologist. Futures advanced to $1.29675 a pound on Jan. 25 in Chicago tradng, the highest since at least 1964.

“Cautious bullishness is the best phrase I could use to describe the commodity market,” saidJeffrey Sherman, who helps manage about $24 billion of assets for DoubleLine Capital in Los Angeles. “The economic data isn’t bad. It’s been slightly positive, so given the confluence of the new year and new fund flows with people looking to rebalance and put capital to work, the backdrop is you have a market that wants to go up.”

To contact the reporter on this story: Whitney McFerron in Chicago atwmcferron1@bloomberg.net

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