Funds not main driver of commodity prices - Barclays

LONDON (Reuters) - The flows of fund money into commodity market instruments this year have not been the main driver of prices as those who would like stronger regulation believe, Barclays Capital said in a note this week.

"Fundamental factors have been far more important at dictating the course of commodity price movements than investment flows alone," Barclays said.

"We would argue that the causality is running in the opposite direction ... investors have increased their exposure to commodities precisely because many markets look undervalued."

The U.S. Commodity Futures Trading Commission said last week it would seek federal limits on the number of oil and gas contracts that banks and funds are allowed to hold. The move could deprive U.S. exchanges of billions.

Analysts say the CFTC's bid to curb speculation in energy trading will make these markets less attractive for speculators and could push them towards unregulated foreign markets.

However, according to Barclays, the move may be in vain.

Commodities saw inflows of $39.9 billion (24.5 billion pounds) in the first half of 2009, with $15.1 billion in precious metals, $14 billion in energy, $7.8 billion in agriculture and $3 billion in base.

Last year, commodities saw inflows of $18.9 billion in the first half, with $6.99 billion in energy, $5.8 billion in agriculture, $4.87 billion in precious and $1.25 billion in base.

Gains in the S&P GSCI commodity index did not mirror the increase in flows.