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Commodities Crushed! Don’t Blame China


The sell-off in commodities is getting serious in early trading on Monday. Word of Chinese GDP coming in at 7.7% against 8% expectations last night is being blamed, but today isn't the start of the selling. Brent crude is down 3%, but was already 15% lower that where it traded in February. Copper is near 18-month lows, aluminum is near 3-year lows and silver is down double-digits today alone.

Yahoo! Finance senior columnist Michael Santoli says a confluence of negatives are weighing on commodities as a whole. The accelerating flight out of funds playing emerging market growth can't be ignored as a significant anchor on prices.

"The commodity funds that were riding this trend, big money raisers in the past several years to play the supposed super cycle, clearly are in liquidation on some level." says Santoli. "I think it was underestimated exactly how much strong growth and therefore a lot of wealth creation in China and India was directly fueling gold and silver purchases."

Related: Gold Getting Hammered- Watch $1,340, Says Najarian

With would-be industrial buyers of the goods pulling back their orders, at the same time aggressive redemption of trading funds is happening, a double-whammy for prices. Taking but one example, the SPDR Gold ETF (GLD) saw more than 2% of its assets under management walk out the door in just the week ending April 11th. Once the largest ETF in the world with nearly $80 billion AUM, the GLD has shrunk by more than 25% since 2011.

Global growth and fund flows are two of the three usual suspects when it comes to dropping metal prices. The last and most obvious catalyst are currency fluctuations. Obviously a stronger dollar would lead to lower prices, but the theme in paper money in 2013 is less dollar strength than paper money chaos.

The metal enthusiasts may not like it but as Santoli puts it, "paper is working right now." Stocks and bonds are doing well and central banks haven't totally lost control despite their unprecedented efforts at outright manipulation of markets.

For now at least, cash is king relative to other traditional hiding places. China's slowdown is part of the puzzle but the search for all comprehensive answers about what's hitting commodities remains elusive.