The quiet trading in commodities markets on the last day of last year wasn’t just the result of investors being on vacation — it was a sign that oil, gold, wheat and other futures had fallen from grace during a turbulent year.
Commodities surged during the first six months of last year on a combination of rising demand from growing economies including China and India and a huge wave of speculative buying. But in the second half of the year, futures plunged as major world economies fell into recession and speculators fled the market, hoping to avoid devastating losses.
Last year, the Reuters/Jefferies CRB Index of 19 raw materials fell 36 percent, the most since the gauge debuted in 1956, to 229.54. It rose to a record 473.97 on July 3. On Dec. 5, the measure dropped to the lowest since August 2002.
The performance of crude oil was the most blatant example of what happened to commodities during the past year.
Crude hit US$100 a barrel for the first time on Jan. 2 and then soared over the next six months, hitting a once-unimaginable US$147.27 on July 11. Then the reality of a global economic downturn set in.
After skidding to the US$35 level late last month, the February contract for oil closed on Wednesday at US$44.60, up US$5.57 on the New York Mercantile Exchange, giving it a loss of 53.5 percent for the year. Crude is down nearly 70 percent from its high.
Gold prices completed their eighth straight annual gain, finishing up US$14.30 at US$883.60 on the Nymex, but down from a record US$1,033.90 reached earlier in the year. Gold began the year at US$838, giving it a gain of 5.4 percent for the year.
“Macroeconomically, we’re in a free fall,” said John Brynjolfsson, the managing director and chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California. “That’s a complete destruction in industrial production and demand, and this is likely to keep pressure on the commodity sector in general.”
Last year, 15 prices dropped in the CRB, led by gasoline’s 59 percent fall. Only four climbed, paced by cocoa’s 31 percent rise. Sugar, gold and hogs were the only other commodities to post gains.
The rally in commodities actually began in 2007, as demand from growing economies increased. Early last year, agricultural contracts, particularly wheat, also rose on bad weather in growing areas.
Meanwhile, many on Wall Street turned to the commodities market for safety over the year as the stock market buckled. As futures began to rack up gains, hedge funds and other big investors bought heavily, believing prices could only go higher and that this was the market where they could grab hold of some big returns.
But as it became clear that the recession was spreading around the world, stocks and commodities plunged together. As demand seemed to be waning for raw materials, so did speculators’ appetite for commodities; several hedge funds that bought at the top of the market, particularly in oil, ran into trouble and were forced to close.
Still, even when there are signs that the world economy is improving, many investors are unlikely to flood into the market as they did last year. The billions of dollars lost as speculative buyers fled the market have left many investors humbled.