EDITOR'S NOTE: Don’t Miss a Beat! Kitco News is launching a weekly Newsletter highlighting  our most popular features, articles and videos! Sign Up by clicking on the Kitco Newsletter Box.

Commodity Indexes Falls As Weak Grain, Energy Prices Weigh On Values

By Debbie Carlson Kitco News
Wednedday July 16, 2014 2: 00 PM

(Kitco News) - The main commodity indexes are at their lowest levels since the beginning of this year, dragged down by weaker energy and grain prices.

The indexes extended their losses Monday when gold prices fell sharply, and this weakness is gathering interest about the outlook for commodities. The weakness in the indexes comes as the U.S. dollar tries to rebound, too. That in itself comes as no surprise since commodities are dollar-denominated so a stronger dollar is often correlated with weaker commodity prices.

Whether or not the commodity indexes can start to bottom here or will continue to fall will depend on the outlook for the U.S. dollar, the size of the U.S. corn crop and energy prices, analysts said.

Andrew Thrasher, certified market technician and investment analyst at Financial Enhancement Group, said the bulk of the losses are attributed to weaker energy prices, which occupy the largest share of commodity indexes.

“Of course it’s going to move pretty in tandem with crude. But at this time you’re seeing the other pieces of the commodity sectors are also weakening. Grains have taken a large hit recently. Gold started to stabilize but it’s weakened here the past couple of days,” he said.

Higher crude oil production and a so far limited reaction to Middle East skirmishes in Iraq and in Israel took crude oil prices off their highs, Thrasher said. Meanwhile near-perfect growing weather in the U.S. Midwest has agronomists forecasting potential record corn and soybean crops, which are developing now.

Gold prices fell on profit-taking Monday after six straight weeks of higher weekly closes.

Along with energy, agriculture and metals make up the majority of the index, which is why the value has fallen so sharply. Did the weakness of the commodity indexes influence gold’s weakness earlier this week? Analysts say no.

“This is the parts wagging the dog,” said Sterling Smith, futures specialist at Citibank Institutional Client Group.

Seasonal Peaks In Energy

Thrasher and Ken Morrison, founder of online newsletter, Morrison on the Markets, said unless there is some sort of new geopolitical flare-up, energy prices could be past their seasonal peak. Thrasher said oil is holding near its 200-day moving average, which might offer the contract some support.

Morrison said crude’s bounce Wednesday was a good sign; however, he’s concerned that the energy market may be vulnerable to further losses because speculative traders hold heavy long positions, as seen in the Commodity Futures Trading Commission data.

And Smith said unless something drastically changes with Midwestern weather, the U.S. is likely to harvest a bumper corn and soybean crop, which will put further pressure on prices.

Despite some of these concerns, some of the analysts said there might be some buying opportunities here.

Erik Swarts, founder of the market research site Market Anthropology, said the earlier weakness in precious metals notwithstanding, “broader commodity space was following in the month-old footprints of the precious metals sector, as the CRB - relative to equities - was testing the cycle lows from earlier in the year. We expect that similar to the upside pivots in early June in silver and gold, oil will also find its footing and surprise to the upside.”

The commodity indexes may end up consolidating a bit more, Morrison and Thrasher said.

“Sometime we’ll see a low, but we might see it in a few months. There is a greater risk/reward to the upside,” Thrasher said.

Swarts said he’s going to watch the U.S. dollar for further direction. “The next moves hinge on the U.S. dollar, which I still expect will roll over and plumb the bottom of its long-term range as inflation seeps out in fits and starts,” he said.

Related Stories:

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
kitco news

Precious Metal Charts

Click to see this Precious Metal chart
  1. 24h
  2. 30D
  3. 60D
  4. 6M
  5. 1Y

Interactive Chart