Prices of metals, energy and grains tumbled on Thursday as commodities were caught up in a global rush out of risky investments for the safety of cash.
The Reuters/Jefferies CRB Index, a basket of 19 commodity futures widely watched by economists and traders, was down 3.8 percent at midday, hitting its lowest level in seven months.
Selling by hedge funds and other short-term investors sent copper futures down 8 percent in New York by early afternoon. Chicago soybeans dropped their daily limit of 50 cents per bushel and New York Mercantile Exchange crude oil was almost 4 percent lower.
Even gold, normally a haven for investors looking to protect wealth, was down 3.4 percent in a widening U.S. mortgage market meltdown as investors sold liquid investments to cover losses in a worldwide stock market rout.
This would have compounded the pain for investors who had exposure to commodities to offset losses in stocks and bonds.
Hedge funds are sort of gearing up to the expectation that they'll get a lot of redemption notices over the next few weeks and that during the course of September they're going to have to be liquidating positions in order to free up cash to meet those redemption notices, said Jeffrey Christian, managing director for commodity research firm CPM Group.
Christian was not surprised commodities were falling along with stocks as a liquidity crisis causes a rush to cash, and investors sell everything, including commodities.
He predicted very choppy markets for the next two or three months in stocks, bonds, currencies and commodities.
It's the commodities equities that are taking it on the chin, much more so than the underlying goods, Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California, said, referring to stocks of companies involved in commodities, like mining companies.
In a broad market sell-off, panic measures go to extreme levels. You can see it in the volatility, you can see it in put/call ratios ... it's happening. In that environment, investors throw the baby out with the bath water, he said.
Some pension funds and college endowments have pegged investment to commodity indexes and commodity-backed securities to diversify portfolios, based on a theory that a broad basket of commodities will have a low or negative correlation with other asset classes. But the market squeeze has thrown the expected relationships out of whack, at least temporarily.
The RJ/CRB Index fell below last week's low of 308.22 to 299.60 by 12:54 a.m., the lowest since Feb 12.
The RJ/CRB is made up of futures in live cattle, cotton, soybeans, sugar, frozen concentrated orange juice, wheat, cocoa, corn, gold, aluminum, nickel, unleaded gasoline, crude oil, natural gas, heating oil, coffee, silver, copper and lean hogs.
The giant S&P GSCI fund (.SPGSCI: Quote, Profile, Research), which has a pronounced energy weighting, hit its lowest since June 13 on Thursday.
We haven't seen any (commodity) index liquidation yet. However, we have seen hedge funds maniacally running for the exits in everything, said a trader at a global hedge fund.
The RJ/CRB hit a 10-month high at 326.84 in July and commodity indexes outperformed the stock market in the first half of 2007.
What people are trying to capture with commodity index investment, in my opinion, is the normal correlation. They know in their hearts it's not going to save them in a real liquidity crunch, the trader said.
On the other hand, there may be lot of novice commodity investors out there who maybe are surprised, who maybe expected commodities to hold up well when everything else was going down. They're going to be unpleasantly surprised by soybean prices today, to say the least.