Commodities markets do not move together. In fact, they can move in very opposite directions. Additionally, they can move in directions that are very different than other asset classes because they will respond to different fundamentals.
A look at the current drawdowns across many of the markets in the DJUBS index shows the significant diversity in these markets.The table below shows the markets in drawdown over the last year, two years and three years. We are looking at a set of 22 markets across metals, agriculture and energy sectors. First, currently just over 1/3 of all markets in the major index are in drawdowns of over 20%. For the two and three year period, the number of markets that are in a 20 percent drawdown are 2/3 rds of the total. Second there are some markets that have over 50% drawdowns over the last two and three years.
Where are the drawdowns centered? None of the energy complex markets are in large drawdowns. In the agriculture markets, 5 of 11 markets are in 20% drawdowns in the last year. In the metals markets, 3 of 6 markets are in 20% drawdowns with both of the precious metals in large drawdowns. Over the longer three year period, we have the majority of metals and agricultural markets in drawdowns. the outliers are the energy markets outside of the natural gas markets which is driven by the structural changes in shale discoveries.
This commodity price behavior is in direct contrast with the equity markets which have shown strong gains over the last three year. commodity markets will follow longer-term cycles and show more mean reversion. Agricultural markets can go through cycles based on longer-term planting behavior by farmers. If farm income is strong from high prices, there will be continued planting until prices have an impact on farm income levels which then change farmer behavior. In the case of metals, there is a long lead time with mine development. Hence, there will long cycles in these markets as new supply comes to market and forces prices lower. Metals markets will also be affected by the business cycle. Oil price seems to follow a different pattern given the control of oil by state companies and the strong surges in demand from the emerging markets. The energy sector cannot be viewed as a long-term storable commodity markets.
The drawdown analysis suggests that commodity markets have to be viewed as very independent and cannot be grouped together in the same way that is seen in other asset classes like equities or fixed income.
| Drawdowns | 1 year | 2 year | 3-year | ||
| silver | -38.59% | coffee | -58.71% | coffee | -61.49% |
| coffee | -36.19% | silver | -50.58% | silver | -55.87% |
| sugar | -31.85% | natural gas | -45.17% | natural gas | -54.97% |
| wheat | -27.91% | sugar | -44.25% | cotton | -53.17% |
| KC wheat | -25.77% | nickel | -42.88% | nickel | -51.22% |
| gold | -23.68% | cotton | -39.46% | sugar | -45.06% |
| nickel | -23.19% | aluminum | -36.17% | wheat | -39.37% |
| corn | -22.38% | zinc | -31.20% | aluminum | -38.64% |
| KC wheat | -30.83% | KC wheat | -36.47% | ||
| wheat | -28.64% | zinc | -34.75% | ||
| copper | -28.62% | copper | -31.07% | ||
| gold | -28.05% | gold | -28.05% | ||
| soybean oil | -24.96% | soybean oil | -27.12% | ||
| corn | -22.38% | corn | -22.38% | ||
| 36.4% | 63.6% | 63.6% |
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