March 23 — Michael Aronstein, the strategist who predicted last year’s commodities collapse, is putting 20 percent of the money he manages into raw materials in a bet that prices have bottomed.

Aronstein started buying metals, agriculture and energy futures this month for the $115 million fund he helps manage at Oscar Gruss & Son Inc. in New York. The worst commodity rout in at least five decades forced producers to idle rigs and mines at the same time China and the U.S. spend $1.4 trillion on roads, bridges, schools and hospitals, reviving demand, he said.

“People have gotten way too negative about the global economy,” Aronstein, 55, said in an interview. “The markets did not react in a normal recessionary tract. It was like we went through the outbreak of a war or some enormous natural disaster that just closed down the global capital markets.”

Aronstein, a graduate of Yale University who makes knives and tools as a blacksmith in his spare time, isn’t alone. Merrill Lynch Global Wealth Management says commodities will benefit as the economy improves. Theresa Gusman, who manages $215 billion for Deutsche Bank AG’s DB Advisors unit, is telling clients to buy raw materials from copper to oil because of “dramatic” cuts in supplies.

About 43 percent of U.S. rigs exploring for natural gas have been shut since September, the fastest pace since 2002, according to Baker Hughes Inc. Copper producers reduced output by more than 870,000 metric tons this year, or 6 percent, estimates CPM Group, a commodity research firm in New York. Global spending on exploration and production at mining companies has been slashed 50 percent, Gusman said.

‘Optimal Time’

“Now is the optimal time to invest in commodities,” Gusman said. “Supplies have been cut back dramatically and it will lead to a fast depletion of resources. There’s been a significant pullback in exploration. There may be shortages.”

Officials from the Organization of Petroleum Exporting Countries and the International Monetary Fund said at a conference on March 17 that lower oil prices are curbing investment in new fields, risking a supply crunch when the economy recovers. OPEC members idled 4.2 million barrels of daily production, or 14 percent, since September after crude prices collapsed to $52.07 a barrel on March 20 from the record of $147.27 on July 11.

Stockpiles of commodities from copper to coffee have fallen, helping to boost prices the past three weeks. Copper has jumped 17 percent this month, as inventories monitored by the London Metal Exchange dropped 7.1 percent to 503,950 metric tons. Coffee is up 9.7 percent since March 10 to $1.162 a pound on ICE Futures U.S. in New York.

Signs of Rebound

The Reuters/Jefferies CRB Index of 19 commodities rose 6.9 percent since the end of February to 226.08 on March 20, heading for the first monthly gain since June after plunging as much as 58 percent from a record 473.97 on July 3. Among the top gainers in March were copper, crude oil, gasoline and corn.

“Just like high prices are the best fertilizer for a new crop, low prices are the best extinguisher for the old crop,” said Dennis Gartman, an economist and the editor of the Gartman Letter in Suffolk, Virginia, who also correctly forecast the peak in commodities last year. “If you look at most commodities now, you’ll see that they’ve already bottomed. The commodity markets are telling you that there is a strengthening environment in the economy.”

Defying Recession

Prices are increasing even as the U.S., Japan and Europe suffer through the first simultaneous recessions since World War II. During the 16-month U.S. slump from July 1981 to November 1982, the last major recession, the CRB index dropped 11 percent.

“The stimulus plans and other government plans that are happening are coming from a point of weakness, not from a position of strength,” said Gijsbert Groenewegen, a partner at Gold Arrow Capital Management in New York. “You’re not going to see gains for things like copper or oil or the other industrial commodities. They should fall further.”

Aronstein, who started following commodities in 1979 as a strategist at Merrill Lynch, started his first hedge fund in 1987, investing mostly in equities. In 1992, he founded a commodity- focused fund, forecasting that global growth would spur demand for natural resources. The CRB index gained for three straight years starting in 1993. In 1995, he was named one of the 10 best investors of the decade in the Financial Times’ “Guide to Global Investing.”

Commodities or Tech

In 1997, he started a private-equity firm that acquired natural-resource producers, including a timber mill and lumber company, Preservation Wood. He’d make the 400-mile (643-kilometer) commute from his home in Westchester County, New York, to New Portland, Maine, to oversee mill operations and sometimes worked the saw himself to ensure orders got filled.

“Back then, you couldn’t get anyone interested in commodities” because it was the height of the technology-stock boom, said Aronstein, who graduated from Yale in New Haven, Connecticut, in 1974 with a Bachelor’s of Arts degree in English. “All the assets I had looked at in 2000 were selling at six or seven times the price in 2007,” he said. “I just couldn’t get anyone interested. They all wanted to know, ‘Does this have an Internet play?’”

Aronstein, who is married and has two sons, folded his private-equity firm, Commercial Materials, in 2001, just before the start of the six-year bull market in commodities that caused lumber to double and led to a six-fold gain in copper and crude oil.

Commodity Boom

The CRB index more than doubled from 2002 through the first half of 2008, as surging demand and speculative investment in commodities sent the prices of oil, corn, wheat, rice, copper and platinum to records.

The rally began to fade in July on concern the global recession would curb demand. The CRB plunged a record 50 percent in the last six months of 2008 and another 1.5 percent this year.

“One of the things that is unique now is that we’ve just seen a whole bear-market cycle in commodities within a six- or eight-month span,” Aronstein said. “A lot of what happened in commodities had to do with the flow of speculative money. Now, you’re going to see things trading more in line with the fundamentals of each commodity.”

The 29 percent jump in copper this year is an early indication that demand has begun to rebound in China, the world’s biggest metals user, according to Frank Holmes, chief executive officer of U.S. Global Investors Inc. in San Antonio. China’s copper imports surged to a record 283,461 metric tons in February, the Beijing-based customs office said on March 16.

Early Indicator

The metal’s gains have predicted rallies for commodities in the past, said Holmes, who helps manage $2.1 billion. In the first quarter of 2002, copper jumped 17 percent, leading gains in the CRB index. The gauge jumped 23 percent that year, the biggest annual increase since 1979.

Copper will continue to climb in 2009 as last year’s drop forced mining companies to cut production, leaving “tight” supplies of the metal, Holmes said.

Low prices forced Phoenix-based Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, to fire 1,550 employees since December, or 5 percent of its global workforce. The company has announced mine closures that will curb output by 11 percent next year.

Freeport reported a fourth-quarter net loss of $13.9 billion after writing down the value of mines, metal inventories and goodwill related to the acquisition of Phelps Dodge in 2008. Freeport tumbled 76 percent in New York trading last year. The shares rallied 60 percent this year to $39 as copper rose.

Dr. Copper

“They call it Dr. Copper, because it’s used as an economic bellwether,” said Paul Baiocchi, who helps manage $1 billion as a senior market strategist at Delta Global Advisors Inc. in Huntington Beach, California. “We should see soon enough a tremendous pickup in the amount of imports of raw materials in China.”

China’s 4 trillion-yuan ($585 billion) stimulus spending will help boost commodity demand by 15 percent a year for the next five years, Holmes forecasts. Merrill Lynch expects the Chinese economy to grow by 8 percent this year, accelerating to 9 percent in 2010, because of government spending.

“What you are going to see is a rapid rebuild in demand, particularly in places like China,” said Gary Dugan, the London- based chief investment officer for Europe, the Middle East and Africa at Merrill Lynch Global Wealth Management. Commodities are “the only asset class where there is going to be less supply in the future than in the past,” he said.

Renewed Interest

Doe Run Resources Corp., the world’s second-largest lead refiner, said the slump is ending.

“We’re seeing better demand now, compared to the past few months,” said Jose Hansen, a vice president of sales and marketing for St. Louis-based Doe Run. “We’re still below the levels we saw at this time in 2008. But I expect that demand is going to continue to increase.”

Investors also are returning. Net inflows into commodities totaled more than $2.6 billion this year, according to EPFR Global, which conducts research on money flows from Cambridge, Massachusetts.

Matching expectations to reality was what led Aronstein to say in June of last year that commodities were “near some kind of reckoning,” because speculators had driven prices away from supply and demand fundamentals. Now, prices don’t reflect the potential for demand to rebound, he said.

“People are just scared to death right now, so they’re not looking at the bigger picture,” said Aronstein, who also is president of Marketfield Asset Management. “All these emerging markets, like China and India, they still have a lot of money. I can’t imagine that these countries are going to let the power go out or let people go hungry. The basic level of consumption is going to continue and the supply capacity has plunged. These prices will have to come up.”

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