Tuesday, October 1, 2013

Commodities under pressure again

The rally in commodities, which started in August has petered out. Several major commodities indices show significant declines on a year-over-year basis.

CRB BLS Spot Cash (commodity) Index (source: Barchart)

Dow Jones UBS Commodity Index

There are several reasons prices have turned lower again:

1. The government shutdown certainly is not helping - if anything, just due to slower expected economic activity.
2. With the Syria strike seemingly off the table for now and new hopes for a better relationship with Iran, energy prices have stabilized.
3. A number of emerging market nations are still reeling from recent capital outflows, weak currencies, and tighter monetary conditions. This is expected to cap demand for raw materials and energy.
4. While the Fed chose to keep up the securities purchases, taper is only a matter of time. And that is also a negative for commodities.
5. There seems to be a commodity fund that was forced to liquidate positions - which is adding to the pressure across various commodity sectors.
Reuters: - Prices for gold, copper, crude oil and a number of other commodities fell on Tuesday after the U.S. government's partial shutdown caused investors to sell and discouraged others from buying.

In addition, talk circulated that a commodities fund was having to liquidate positions.

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