Investors Flee Commodities

By Ira Iosebashvili And Tatyana Shumsky 

        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.
        "The dollar is going to be going higher and that's definitely going to be a serious headwind for oil," said Tariq Zahir, managing member for investment firm Tyche Capital Advisors.
        The pullback in commodity prices already is rippling across financial markets and the global economy. Currencies of commodity-producing countries such as Canada and Australia are in decline as export revenue tumbles, hammering economic growth and employment. Companies that mine copper or drill for crude oil also are under pressure as prices fall toward, and in some cases below, the cost of production, forcing them to close operations or face potential losses.
        Intensifying the pressure, global stock and bond prices have been buoyant, helped by a gathering U.S. recovery, a rebound in Europe and easy central-bank policies around the world.
        "It is a question of choosing which asset class you want to be in and for many investors, commodities are not that asset class," said Edward Meir, a strategist at brokerage firm INTL FCStone Inc.
        Many investors came to commodities markets during the historic rally in the early part of the last decade, when the dollar was in decline and many feared that global supplies would fall short of the needs of an increasing population. Now, the dollar is near a 12-year high, and analysts said that when the Fed raises interest rates the currency's value is likely to increase.
        Last week, Fed Chairwoman Janet Yellen said the U.S. central bank is on a path to raise interest rates this year as long as the current economic recovery continues apace.
        On Monday, raw sugar fell 4.4%, to 11.44 cents a pound, the lowest price since January 2009, amid ample global supplies of the sweetener. The currency of Brazil, the world's largest sugar producer, has dropped 17% against the U.S. dollar this year, as firms boost production to make up for reduced dollar sales.
        The selloff in commodities has been particularly hard on gold prices, which are off 41% from an all-time settlement high of $1,888.70 a troy ounce hit in August 2011 amid the euro crisis. Investors flocked to gold as they scrambled to shield assets from the financial crisis, believing the metal would hold its value better than stocks or bonds during turbulent times. Many contended government responses to the tumult would spur a wave of damaging inflation.
        But that hasn't come to pass and the case for holding gold has taken a pounding in recent years, as money managers have been reluctant to allocate funds into the precious metal when easier gains could be had in the world's soaring stock markets.
        With a rate increase now on the horizon, the picture for gold becomes darker still, investors said.
        "We have a relatively hawkish Fed, which has led to a strengthening of the dollar and a move higher in U.S. [bond] yields, and both of those things are negative for gold," said Nicholas Johnson, who helps manage $17 billion invested in commodities across several funds at Pacific Investment Management Co.
        "If our expectations play out for the dollar and yields, that could mean further downside for gold prices," he said. Mr. Johnson said he sold his bullish gold holdings a little over a week ago.
        Meanwhile, central banks in Canada, Australia and New Zealand have been cutting interest rates to counter the hit to their economies from falling oil, iron ore and dairy prices, respectively. Subsequently, lower borrowing costs and falling growth forecasts are weighing on the currencies of these commodity exporters, driving them to near six-year lows.
        The Australian dollar has fallen 9.8% versus the greenback in 2015, to US$0.7372. The New Zealand dollar has plunged 16% against the buck this year, to US$0.6567. The Canadian dollar has dropped 11% in 2015 against its U.S. cousin, to C$1.2995.
        The U.S. dollar on Monday closed above 16 Mexican pesos for the first time, and has risen 8.6% against the currency this year. The peso has been weighed down by falling oil prices but also by investors' anxiety that the prospect for higher interest rates in the U.S. will make the currency less attractive and fall even further.
        James Ramage contributed to this article.
        (END) Dow Jones Newswires

        July 20, 2015 19:16 ET (23:16 GMT)

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