The prices of raw materials from oil and gold to copper, cotton and sugar tumbled, underscoring an increasing aversion to commodity investments as the Federal Reserve prepares to raise interest rates for the first time in nearly a decade.
U.S. oil prices dipped below $50 a barrel on Monday during intraday trading for the first time since April, while gold slid 2.2% to its lowest level in five years.
The drops extend a retreat from the commodity sector that has picked up speed in recent months. Hedge funds and other investors are holding more bearish than bullish wagers on gold for the first time on record going back to 2006, according to data released Friday by the Commodity Futures Trading Commission. Investors cut their bullish bets on oil to the lowest level since March.
Investors pulled roughly $1.1 billion from commodities-sector funds during the second quarter of 2015, according to fund-data provider EPFR Global.
Driving the selloff are expectations that the Fed will raise borrowing costs in coming months, a move that investors expect to further boost the dollar and pressure the prices of commodities, which generally are priced in the U.S. currency. A rising dollar makes raw materials less affordable to overseas investors, while higher interest rates tend to draw money into yield-bearing assets and away from commodities, which pay their holders nothing and often carry storage costs.
Commodity prices fell close to the lowest level since 2002 on Monday, under pressure from a rout in precious metals, lower oil prices and weakness in most agricultural and soft commodities.
The excess return Bloomberg Commodity index, which tracks a basket of 22 materials, was on course for its lowest close in 13 years as strengthening dollar weighed on well-supplied markets for energy, metals and grains.
Across commodities, there are increasing signs that the more than decade-long “commodity supercycle” has ended.
Producers have responded to several years of elevated prices by bringing on new supplies, which have more than met growth in demand from emerging markets.
Gold dropped below $1,100 an ounce for the first time in five years; US WTI crude oil futures fell within a few cents of $50 a barrel, less than half its level of July last year; and copper in London slipped back towards a six-year low near $5,400 a tonne.
As originally proposed, the size of the surcharge would have been determined based on a measure of each bank’s systemic importance relative to other global banks. This made individual surcharges somewhat unpredictable; they would depend not just on a bank’s own actions but those of others, too. So, a bank seeking to reduce its surcharge by shrinking could be stymied if other banks took the same tack.
That wasn’t what the Fed wanted. Discussing the new rules, Chairwoman Janet Yellensaid the goal was to force banks either to shrink or to hold substantially more capital.
The revised rule uses a fixed measure of systemic importance. That should make the surcharge more predictable.
In Shanghai, close to 5 tonnes of gold was sold on the SGE in a two-minute window just prior to 9:30am, in a market where the normal volume traded is 25 tonnes in an entire day. The August 15 Comex gold contract also saw 7,600 contracts traded in the same two-minute window, though intraday trading data showed an unusual spike in Comex volume just before Shanghai, suggesting Comex gold lead the selloff, but SGE clearly exacerbated it.
Thianpiriya says the technical outlook is very bearish now for gold, saying “further downside risks remain” and that “other indicators also suggest the likelihood of an immediate rebound is low.”
Gold fell 1% on Friday after the People's Bank of China revealed lower than expected gold reserves. All the signs coming out of the world's biggest gold consumer right now are cautious.
“We would be sellers of rallies, and wary of buying dips,” Thianpiriya says.
Here’s a chart of the crazy move in the gold price.