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Analysis:Commodity bulls, bloody but unbowed, to charge anew
May 5, 2011 / 10:57 PM / in 7 years

Analysis:Commodity bulls, bloody but unbowed, to charge anew

NEW YORK (Reuters) - The brutal selloff in commodity markets on Thursday had no obvious trigger, and by the same token, there was no obvious reason why prices should not recover in the next few weeks or months.

The speed of this week’s retreat, which went into free-fall on Thursday as oil prices plunged by a record $12, has stunned many traders. The 19-commodities CRB index .CRB fell 5 percent, a level exceeded only four times before, three of those in the midst of the 2008 financial crisis.

“When you have this kind of damage, it will take several weeks, or maybe several months, for people to be taken out, and for confidence to be rebuilt,” said Dennis Gartman, author of markets guide “The Gartman Letter”.

“It’s not the end of the commodities cycle, not even close. You still have to call this a correction. It’s a sizable one and scared the heck out of everybody.”

Traders are struggling to grasp what turned sentiment so negative so quickly. Some secondary economic indicators were weak -- U.S. weekly jobless claims rose sharply, service sector indices softened, private payrolls for April were weak and in Germany industrial orders slumped 4 percent. But these barely moved equity markets.

The U.S. dollar has risen sharply but that appears more related to oil’s drop than a play on European rate policy, after the European Central Bank on Thursday sounded a little less hawkish than expected. And the notion that the sell-off was triggered by a 25 percent slump in silver -- a market that’s just a twelfth of the size of global oil futures -- is laughable to many market strategists.

Certainly they do see a herd mentality in commodities, a market that has attracted a wide range of new investors taking advantage of the cheap money offered by U.S. Federal Reserve Chairman Ben Bernanke since last August. Herds can be skittish, moving very suddenly and stampeding out of markets.

While the cause of Thursday’s retreat remains difficult to pin down, the depth of this week’s correction -- down 8 percent since last Friday -- isn’t without precedent.

In fact, the CRB index has three times over the past 10 months fallen by about 8 percent over the course of two to three weeks; each time it was back to new peaks within about a month in a remarkably similar chart pattern. (Graphic: )

Given the technical carnage caused on Thursday, few traders expect such a quick recovery. But like the old adage “Sell in May and go away”, they do expect investors to come back.

“I don’t think commodities are done going up for the cycle, that is over the next several years, but I think they may be done for the next several months,” said James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, which has about $340 billion under management.

He said the biggest damage near-term could come from monetary tightening in China, India and other major commodities consuming economies in the developing world. Such inflation-fighting measures have incrementally dampened demand for raw materials over the last year, he said.

A continued snap back in the oversold dollar was another factor that could keep commodities suppressed. Until its sharp rebound on Thursday, the dollar was at three-year lows, inflating prices of most raw materials that trade on the greenback. The dollar jumped 1.5 percent against a basket of currencies .DXY on Thursday, its biggest gain since October.

What hasn’t changed, however, is the fact that developing nations like China and India are still expanding briskly, and will require ever more metal, grain and energy from a world where producing those materials is more and more costly.

PIMCO, which manages the $21 billion Commodity Real Return Strategy fund (PCRDX.O), the world’s largest commodity mutual fund, isn’t about to change its view.

Mihir Wohrah, told Reuters he saw “no change in the long-term secular view of generally higher commodity prices” despite the brutal selloff.


For many, the dive in prices was a compressed correction that had been long overdue. While a host of commodities such as copper, cotton and corn had already faded from recent peaks, oil, precious metals and others were still seen as frothy.

Goldman Sachs advised customers to take profits from major commodity markets three times in early April, saying prices had moved too far, too fast.

The Reuters-Jefferies CRB index .CRB, a global benchmark for commodities, fell almost 5 percent on Thursday for its biggest one-day loss since March 2009. For the week, the index was down 8 percent, its worst since December 2008. <COM/WRAP>

The market has been fairly quick in the past to repair such damage.

In November and March, the CRB dropped by around 8 percent from peak to trough over the course of 7 to 8 days, but then recovered to reach new highs almost exactly a month after the initial peak. In August, the 7.3 percent decline was slower, over 15 days, and the market took a month and a half to recover.

Silver is widely expected to face the most difficult road to recovery, having dived over 23 percent since the start of May after the darling of trend-following speculators turned abruptly sour after a series of severe margin hikes.

Oil prices may also struggle to regain their footing as demand contracts in the face of high prices and OPEC talks of raising output. U.S. futures fell below $100 a barrel for the first time in nearly two months while Brent dropped more than $10, the second-biggest one-day fall ever.

While many expected energy and metals to bleed further, they had a brighter view of crops like corn and wheat, which generally lagged Thursday’s drop.

U.S. wheat and corn futures have lost only about 6 percent of their value since the start of May.

“The deck (looks) richer in the agricultural market in summer months,” said Hakan Kaya, manager of a $3 billion commodities portfolio at Neuberger Berman in New York.

Additional reporting by Frank Tang, Chris Kelly, Suzanne Cosgrove, Jonathan Leff, Jennifer Ablan and K.T. Arasu; Editing by Jonathan Leff and David Gregorio

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