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What’s behind the Recent Commodity Rout?

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Russ Koesterich explains what’s behind the recent commodity rout and whether it represents an opportunity for investors.

A quick glance at recent headlines would lead a reasonable person to assume that this year’s big losers are Greek and Chinese stocks. Yet, despite all the furor in the news, the Athens Stock Exchange is down less than 5 percent year-to-date, while the Shanghai Composite remains up more than 10 percent, according to Bloomberg data.

The real damage has been in the commodity complex. Through late July, year-to-date crude oil prices were down around 10 percent, platinum prices were off nearly 20 percent and coffee prices were down almost 30 percent, Bloomberg data shows. Based on the Bloomberg Commodity Index of 22 commodities, the overall complex is now trading at a 13-year low. Several factors account for the sell-off.

What's Behind the Recent Commodity Rout?

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Market Realist: Commodity prices have slumped recently.

Commodities (DBC) have had a rough time in the last 12 months. A stronger dollar (UUP) and low global demand have led to a slump.

The graph above shows the performances of two commodities—platinum (PPLT) and crude oil (USO). Commodities tend to move in a similar trajectory because they have some common drivers such as the dollar. We’ll explain how the dollar affects commodities in a later part of this series.

As you can see, both of these commodities did fairly well in the early 2000s leading up to the financial crisis. The global economy was in good shape and demand was high. But most commodities nose-dived during the crisis, picking up only after the dust had settled.

When global demand–especially Chinese demand–started waning in mid-2014, commodity prices started falling again. Since many commodities have industrial uses, their prices fall as demand wanes. But some precious metals, including gold (IAU), have limited industrial uses. Most commodities are currently trading at six-year lows due to worries that China (FXI) could slow down further. Crude oil prices, for instance, have been headed south because of the mismatch between demand and supply.

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