Divergent Commodities: The May Slide

Commodities started this month having posted another new record, but this long-time winning trade has shown far from stellar performance in May.

Commodities traders at the New York Mercantile Exchange.
Photo: Oliver Quillia for CNBC.com
Commodities traders at the New York Mercantile Exchange.

The amount of money invested in commodities hit an all-time high at the end of April, with over $450 billion in assets under management, according to Barclays Capital. Investors betting on continued blockbuster growth from China and expecting loose U.S. monetary policy to continue to put pressure on the U.S. dollar have been well served by the short dollar, long commodities trade over the past year.

The CRB index, representing 19 individual commodities, has gained nearly 40 percent in the last 12 months, while the U.S. dollar index has declined 14 percent. A weaker dollar typically pushes up commodity prices as the commodity becomes cheaper for holders of other currencies.

But while the inverse relationship between the dollar and commodities remains intact, it's moved in the other direction in the past four weeks. The dollar index has gained over 2 percent in May, putting pressure on commodities, and the CRB Index has slid more than 5 percent.

And unlike the rally in commodities, the recent fall has seen a wide divergence. After spiking to nearly $50 in April, silver prices have been sinking all month, plunging over 20 percent in May to post the biggest monthly slide since 2008. U.S. oil prices are down 10 percent, which is the worst performance in one month since May 2010. Yet corn and wheat prices are ending this month basically where they started.

With various supply and demand scenarios at work, individual commodities have fared very differently this month. In addition to the speculative fervor that's come out of the silver market, some analysts say the supply-demand fundamentals for many industrial metals looks particularly weak on concerns that China's demand growth is becoming less robust. Oil prices are vulnerable to U.S. economic as well as European sovereign debt woes as they may impede fuel demand.

Corn and wheat prices — though off their April highs — have stayed strong due to concerns about global supply. U.S. corn production faces a host of challenges in 2011 from overly wet weather and flooding in the Mississippi basin. Weather risks for wheat — with dry conditions in China and Western Europe and the poor state of the U.S. winter wheat crop — has helped lift wheat prices. (However, the lifting of Russia's ban on wheat exports on July 1 could has caused wheat prices to come under pressure.)

As commodities go their separate ways, investors need to be careful. Some analysts argue the global growth trade may be thrown into question on signs world economies may be slowing. Some commodities may continue to be strongly correlated, and investors should be mindful of reasons individual commodities may come under pressure, which others may continue to hold their ground.