Commodities are the gift that keep on not giving.
The sector is in the throes of an ‘annus horribilis’, having gotten wrecked over the past few years despite massive liquidity that should have boosted their value. Bullish investor after bullish investor has tried to call a bottom, in a set of calls that now appear ill-conceived and money losing.
In the past week, the S&P GSCI Commodity Index has dropped 3.4 percent in the past week, as crude oil plunged 7 percent to hit multi-month lows, and a host of metals fell alongside it.
That, of course, hardly marks the first big drop for the alternative investment group. That widely watched commodity index has fallen 17 percent the last three months, and a whopping 42 percent in the past two years.
It’s not just an energy issue, either. Copper, platinum, lumber, coffee, sugar, wheat, oats and lean hogs are all down double-digit percentages this year. While each specific commodity obviously responds to its own distinct supply-and-demand dynamics, a few fundamental factors appear to be weighing on commodities as a whole.
First of all, the U.S. dollar has risen nearly 8 percent this year against a basket of major currencies, and has rediscovered some of its strength in the past three months.
A strong dollar tends to be bad for commodities, as it should mean that it takes fewer dollars to buy the same amount of a given fixed asset.
And in fact, many investors bought commodities to get protection from a Federal Reserve stimulus-stoked rise in inflation that never came. As the Fed ended its quantitative easing program—and now appears months away from raising rates—what now appears to have been a massive bubble in commodities like gold has slowly popped.
But Fed fears didn’t form the only bull case for commodities. Others maintained that the global economy would heat up, leading to greater demand for industrial commodities like oil and copper.
Instead, Europe has been a mess, and that great commodity consumer China has seen its economy continue to slow.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.