Global Growth Worries Pummel Commodities, From Oil to Gold to Copper

By Tatyana Shumsky And Ira Iosebashvili 

        Investors are bailing on commodities amid mounting worries about the pace of global growth.
        New data showing China's factory activity hit a 15-month low and a leaked Federal Reserve memo betraying concerns about how fast the U.S. is growing added to concerns Friday and accelerated the selloff of commodities--from oil to gold to copper.
        Money managers reduced bets on higher oil prices to their lowest level in 2 1/2 years, while ramping up bets on lower copper prices to their most bearish in two years, according to weekly data from the Commodity Futures Trading Commission. Money managers also turned net-bearish on gold futures and options this past week for the first time ever in data going back to 2006.
        "There is a confluence of negative factors that have created a cloud of uncertainty and doubt," said Michael Turek, head of base metals at BGC Partners. "Investors are thinking that commodities are not the place to be."
        On Friday, copper and silver, both used in electronics, sank to six-year lows. Gold fell to a five-year low, and U.S. oil prices pushed further below $50 a barrel. The S&P GSCI, an index tracking a broad basket of commodities, fell to 3866, the lowest since January.
        The downdraft in commodities reflects wider concerns at a time when supplies of many raw materials exceed demand. China is the world's largest consumer of industrial metals, while the U.S. leads global crude-oil demand.
        Adding to investors' unease were a soft report on the U.S. housing market and the early release of internal economic forecasts by the Fed. The central bank's staff expect a slower pace of growth and interest-rate increases than Fed board members have projected.
        The forecast could cool investors' expectations that the Fed will raise short-term rates this year for the first time since 2006, slowing a dollar rally that has heated up again this month. The dollar was little changed Friday. But the shift will do little to ease concerns that the global economy is slipping, raising doubts about commodities' value as an investment class.
        Growth across the developed world has lagged behind expectations as countries struggled to rebound from the 2008 financial crisis. Meanwhile, expansion in emerging economies is slowing, leading many investors to wonder what will drive demand.
        Global growth has averaged 3.3% in the years since the financial crisis, compared with 4.7% in the six years before 2008, according to International Monetary Fund data. The IMF expects growth of 3.3% for this year.
        "Momentum is against commodities, and the path of least resistance is lower," said Jack Ablin, chief investment officer at BMO Private Bank, which manages some $68 billion. Mr. Ablin has cut all commodity exposure out of his portfolio.
        U.S. benchmark oil prices fell 6% this past week to $48.14 a barrel, a nearly four-month low, while front-month copper prices lost 4.9% to $2.3815 a pound, the lowest level since July 2009.
        Gold ended the week at $1,085.60 a troy ounce, its lowest price in more than five years and down 8.3% so far in 2015. While many investors bought gold as a hedge against global economic turbulence in the wake of the financial crisis, they have shed the precious metal in favor of stocks as concerns about a global economic collapse receded. Investors also have been selling gold in anticipation of higher interest rates.
        "People have been happy to hold U.S. equities, and that's worked pretty well for them," said Nicholas Robin, who helps manage $600 million invested in commodities at Columbia Threadneedle Asset Management in London. Mr. Robin said his fund has held less gold than suggested by commodity indexes and expects prices to head toward $1,000 an ounce by year-end.
        The world's largest gold producer, Barrick Gold Corp., lost $2.2 billion, or 17%, of its market value this past week. U.S. copper-mining company Freeport-McMoRan Inc.'s market value dropped $3.7 billion, or 23%, to $12.8 billion, and Exxon Mobil's fell $11 billion to $334 billion.
        To be sure, some investors say the selloff across resources has gone too far, and prices are likely to rebound toward year-end.
        Paul Christopher, head global market strategist at Wells Fargo Investment Institute, said some traders are overly bearish on China because they falsely connect shrinking factory-activity data to the recent drop in Chinese stocks. "Especially in light of the equity-market selloff of the last month, there's new and particular attention on economic health in China. We've seen contracting [manufacturing] numbers before out of China, and it hasn't meant that the economy is slowing any faster," he said, adding he doesn't expect a "further collapse in commodity prices."
        Others say there is more pain ahead for these markets, and it is too soon to jump back in.
        While a recovery in Europe or Japan could spur demand for raw materials and push prices higher, Mr. Ablin of BMO plans to wait for a sustained rebound in prices before making any purchases.
        "Cheap markets can get cheaper," Mr. Ablin said.
        Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Ira Iosebashvili at ira.iosebashvili@wsj.com
        (END) Dow Jones Newswires

        July 24, 2015 20:06 ET (00:06 GMT)

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