Divergent economic fortunes collectively sap commodities

Amidst the recent drama surrounding the Central Banks, investors have scaled back expectations on a rally in commodities, given the most bearish stance towards these avenues since November. Widespread signs of improving U.S. growth along with fresh concerns of rekindling weakness in the Eurozone have collectively fortified the American dollar in recent weeks, seemingly revitalizing the currency and marking commodity hedges as casualties.

Indeed, hedge funds and other large speculators reduced net-long positions across eighteen U.S. futures and options in the week ended February 12 by 15% to 757,060 contracts, the largest decline since November 13, according to the U.S. Commodity Futures Trading Commission. In particular, bets on higher gold prices fell to the lowest since December 2008, not quite the endorsement gold bulls were looking for in 2013.

Recapping the performance of the yellow metal, Gold prices are down -3.5% since December 31, the worst start to a year since 2001, as U.S. retail sales climbed for a third month in January and consumer confidence rose more than forecast in February. “As confidence is building in an economic recovery that’s sustainable globally, you could lose a bid to gold,” said James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management.

The Standard & Poor’s GSCI Spot Index of 24 commodities fell -0.3% last week, led by declines in silver, which has experienced its own set of woes in recent weeks. The MSCI All-Country World Index of equities slid -0.2%, while the dollar rose +0.4% against a basket of six trading partners. Moreover, US Treasuries 10-year fell -0.1%, a Bank of America Corp. index shows.

The primary culprits or rather catalysts of this movement have been an improving outlook in the U.S. and China, which has helped boost commodities most tied to economic growth this year, while damping demand for precious metals. In particular, bullish silver holdings declined 13 percent to 25,674 contracts, the biggest slide this year.

Elsewhere in Asia, Japan’s economy, the world’s third largest, is in recession after contracting at an annualized -0.4% in the fourth quarter, the Cabinet Office said February 14 “We saw some of the data coming out of Europe as being worse than expected,” noted Walter Hellwig, an Asset Manager at BB&T Wealth Management. “Signs of a deepening recession in Europe may mean declines in demand for commodities as well and the overall tenor of the global economy maybe wasn’t quite as strong as we thought, creating a headwind.”