Commodity bubble set to pop up more regularly

Font Size

Print

Feedback

Email

Discuss

Save & Share Article

What’s this?

Digg	My Yahoo	Fark
del.icio.us	Newsvine	Reddit

Rate This Article

Mar 23 Search for “commodity bubble” in Bloomberg News stories and you will find that the phrase first appeared in October 2004. Now there’s reason to expect it will pop up more regularly. The last five trading days produced the biggest drop in the Reuters/Jefferies CRB Index, composed of oil, gold, corn and 16 other commodities, since the Commodity Research Bureau started calculating the benchmark a half-century ago.

The 9.2% decline surpassed a record set in December 1980, when US banks raised their prime interest rates to more than 20% as the Federal Reserve pushed to tame inflation, and dragged down the index from an all-time high.

Even after the decline, the CRB has more than doubled since 2002. Growing demand for commodities from China, India and other emerging Markets are largely responsible for the surge. US stocks and bonds haven't come close to matching the advance. The Standard & Poor's 500 Index has returned 27% since 2002. The Bloomberg/EFFAS index of US Treasury notes and bonds, a total-return gauge, has added 44%. In response, many investors who wouldn't have gone near commodities before are diving into the market. The California Public Employees' Retirement System, the largest US pension fund, made its first investment last year. So did New Jersey's pension funds. Both voted last month to put in more money.

About half of the 150 investors that Barclays Capital surveyed in New York in December planned to boost commodities to more than 10% of assets. In 2005, a similar survey by the Barclays Plc unit found just 15 percent planned such an increase.

What has all this investment brought? Much higher prices, for sure. The CRB set its records as oil surpassed $100 a barrel and gold exceeded $1,000 an ounce in New York trading. And maybe something else: a closer relationship between commodity prices and share prices of energy and raw-material producers.

The CRB and the Morgan Stanley Commodity Related Index, composed of 20 stocks, have a 0.43 correlation for the year as measured by the coefficient of determination. The number, known as R2, can be between zero and one.

This year's correlation is about triple the average of 0.15 for the past decade, according to data compiled by Bloomberg. A higher reading shows the two indexes move in lockstep or in opposite directions more consistently.