The rout in commodities deepened, with prices settling at the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling.
“Investors are saying the commodities cycle is over,” Dan Denbow, a portfolio manager at the $700 million USAA Precious Metals & Minerals Fund in San Antonio, said by telephone. “Supply has come on faster than there is demand,” especially as China slows, he said.
Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities.
The Bloomberg Commodity Index dropped 1.4 percent to 96.2029, the lowest close since 2002. Gold futures sank to the weakest in more than five years, while industrial metals, grains, and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13. Brent crude extended losses in the wake of a third weekly retreat, as Iran plans to boost oil exports after sanctions are removed, adding to the global glut.
“It just looks like we’re well supplied in a lot of these commodities,” Fain Shaffer, the president at Infinity Trading Corp. in Indianapolis, said in a telephone interview. “The U.S. is going to raise rates, and that’s going to push up the dollar. And with questions about China’s growth, the path of least resistance just seems to be down.”
In China, the largest consumer of metals, grains and energy, the statistics office last week defended its gross domestic product data after economists questioned recent numbers that showed the economy is growing faster than anticipated. Capital Economics Ltd. said it’s probably overestimated by as many as two percentage points due to an inaccurate GDP deflator.
Weaker global demand couple with robust production from mines and crop fields mean that inventories are expanding across commodities. U.S. crude stockpiles remain almost 100 million barrels above the five-year average for this time of the year, data from the Energy Information Administration shows. On July 10, the U.S. Department of Agriculture increased its outlook for global wheat reserves by 8.6 percent.
With raw materials fetching lower prices, shares of commodity producers are tumbling. The 15-member Bloomberg Intelligence Global Senior Gold Valuation Peers Index, which includes Barrick Gold Corp., dropped as much as 9.2 percent.
“China was the focal point for demand for just over a decade, and when that slowed commodities slowed with it,” Quincy Krosby, a market strategist for Newark, New Jersey-based Prudential Financial Inc., which oversees more than $1 trillion, said by telephone.