Commodity Update from a Sea of Red

The chart below tells us everything we need to know about the current state of the commodity market. The barage of market unfriendly news over the last few weeks has turned into a rout with investors scrambling to reduce exposure across the board in order to free up cash needed to cover margins elsewhere. 

 The two sectors that continue to bear the brunt of the selling are energy and base metals as the outlook for demand is being reduced on fears that some developed economies are slipping back into recession.

Weather related issues in the U.S. and elsewhere have limited the sell-off in several agricultural products with speculative positions being held at reasonably low levels compared to previous corrections in the sector.

Gold is the only commodity that stands out as investors looking for safe havens have nowhere else to turn. Even silver has suddenly just become another industrial metal with investors unwilling to commit to it given its recent history of wild corrections.

Investors have been moving into gold on a grand scale and the next chart shows where investors in Exchange Traded Products have been putting their money.  According to JP Morgan investors have over the last year increased investments in gold to such an extent that the yellow metal almost counts for 66 percent of all investments in ETPs and has risen by USD 42 billion over the last year. On top of this, recent data from the Commodity Futures Trading Commision shows that futures investments in gold have risen to almost 25 million ounces. All in all this adds up to almost 3,000 tonnes currently invested in gold through futures and ETPs. This is the only cloud on the gold horizon near term as escalating risk reduction could end up impacting gold as well.

WTI crude has now corrected by one third from its 2011 high and trades below the 2010 average. Brent crude is holding on to three digits for now as the spread to WTI has been widening further. The  pressure from speculative long liquidation is hurting WTI the most given that's where most of those investments have been placed. Up until recently, investments in commodity index funds accounted for 800 million barrels of energy. Added to this an additional 300 million held through futures gives an idea of the scale of liquidation that we have seen.

As long as this liquiditation continues it will make no sense to try calling a bottom but as we are moving closer to several oil producers' break even levels some verbal intervention could be on the cards soon.

Finally all three major commodity index funds are now down by five percent year to date with the SP GSCI, comprising 60 percent in energy, having suffered the most over the last week.