Commodities Close a Quarter of Records and Retreats

The Wall Street Journal

Silver Streaks Toward $50 and Pulls Back. Oil Gives Up the $100 Mark. Gold Tops $1,500, Then Stagnates. Buy the Dip?

When commodities fell sharply in early May, analysts who expect developing-market demand for raw materials to keep growing had a simple suggestion for consumers and investors: Buy the dip.

Then another plunge hit crude oil and some other basic goods in June, leaving would-be buyers to wonder whether the dip is turning into a trough that could contain prices for some time.

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U.S. oil prices have seen single-day drops of 8.6%, 5.5% and 4.6% within the past two months, and ended the second quarter down 11%, at $95.42 a barrel. After an attention-getting leap above $100 a barrel in the first quarter, prices dropped below that threshold in early May and then, after hovering near that level for weeks, took a more sustained hit punctuated by Western governments' decision last week to release oil reserves.

Wheat prices plunged 23% in the quarter, and corn is now flat for the year, down 20% from a record high in early June. Industrial commodities such as copper and cotton have bounced back a bit from recent lows, but remain well below year-to-date peaks. Prices for others, such as silver, have been stuck in a rut since May after pressing toward the unseen $50 mark in April.

Even gold prices have stagnated to some degree, though they still are on track to rise for the 11th straight year. After roaring through the $1,500-a-troy-ounce level for the first time in April, then setting a record high in nominal terms on May 2 at $1,556.70, gold has pulled back. It settled Thursday at $1,502.30, still up 4.4% for the quarter.

The Dow Jones-UBS Commodity Index, which includes 19 markets from aluminum to zinc, fell 6.7% in the second quarter, compared with a 4.4% increase in the first quarter fueled by rising oil prices.

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Various factors have contributed to the pullback, including concerns about U.S. economic growth, the threat posed by Greece's persistent debt woes, and easing concerns about supply constraints for some commodities.

Also, investors had been girding for Thursday's end of the Federal Reserve's economic-stimulus program.

Critically, a trio of fast-growing commodities consumers—China, India and Brazil—also are a major question mark. The earlier run-up in commodities sparked inflation in those countries, prodding policy makers to slow domestic growth. That, in turn, is curtailing a crucial source of increased demand for raw materials.

"They're all very successfully cooling their economies down," said Peter Rup, managing director of Artemis Wealth Advisors LLC.

As a result, Mr. Rup's forecast is for lower commodities prices. "I'm expecting a further contraction, a further decline, across the board," he said.

Since early May, money managers have reduced the number of futures contracts they hold to buy U.S. crude oil by 27%, and also reduced their bullish bets on wheat by 22% and on copper by 28%, as of June 21, according to U.S. government data.

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Even with the declines, many commodities remain far more expensive than a year ago.

Corn is up 78%, crude oil is up 26%, and copper is 46% higher over that period. Cotton has dropped 26% from its all-time high in March, but is still costlier than it had ever been before January.

Looking over 10 years, the gains are particularly striking. A decade ago, oil cost $26.25 a barrel, compared with $95.42 on Thursday. Back then, corn cost about $1.89 a bushel; on Thursday, it settled at $6.29. Gold prices have more than quintupled since mid-2001.

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But the magnitude of the increases is part of what makes some investors nervous about the recent reversals, serving as a reminder of how many years the rally has already lasted.

"These long-term trends take a long time ending, if this is indeed the ending," said Michael Aronstein, president of Marketfield Asset Management.

Mr. Aronstein's view: "In the next five years, you'll do better in traditional equities than in holding a silo of cotton." Mr. Aronstein says his firm, which manages about $1.15 billion in assets, has a "small-to-medium-size short" position on a range of commodities, a bet that prices will fall.

To be sure, there also are plenty of reasons to think this isn't the end of the commodity rally, so much as a pause.

In coming months, prices could get support from Japanese demand for commodities, as it rebuilds after the devastating March earthquake. And while oil-consuming nations recently announced a release of reserves that cut prices, oil could get a boost when they move to restock down the road.

More broadly, China is still growing rapidly, even if the breakneck pace slows a bit, and many other emerging nations are getting wealthier, too.

That leaves intact the fundamental thesis that those nations will consume more raw materials to fuel their growth and satisfy richer populations, and that commodities producers will struggle to keep pace.

"We do not think this is the time to be lightening up on commodity exposure. Quite the opposite," Barclays analysts said in a research note Thursday, adding that "a number of individual markets are exhibiting signs of increasing supply-side tightness."

But the concerns about faltering demand that spiked in the second quarter have investors zeroing in on the risks to that thesis, with one major concern being whether China is able to engineer a soft-landing for its red-hot economy.

"That will ultimately be one of the key things to look at," said Osvaldo Canavosio, a commodity analyst in hedge-fund research at Man Investments.

Write to Liam Pleven at liam.pleven@wsj.com

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