Chart of the Day: Roll over CRB

Today’s chart will be very simple and illustrates what is happening on risk markets around the world.

Its an index I’ve followed previously, the CRB Index – which measures a basket of 19 commodities, split amongst the energy, base metals, agricultural etc.

And what is the chart saying? Rollover and stay down.

The QE effect on exchange traded commodity prices is unwinding faster, as the series of successive lows is accelerating (note gradient of red trend lines under price).

Therefore, if no further stimulus is forthcoming, the target is at or below the price before QE2 in August 2010. If the de-financialisation of commodities continues, the next target is the March 2009 lows, around the 200 level.

Update (h/t Briefly):

Here is the CRB Index plotted against the US Dollar Index (not inverted):

US Dollar Index (black) vs CRB Commodity Index (green) over 18 months

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  1. The QE effect on commodity prices is unwinding faster,…

    …on exchange trade commodities. The effect on other commodities has been less marked because of the absence (absence of dominance) of speculative money in price setting.

  2. Prince it’s getting grim.

    If you look at the food/grains futures it’s the same, at least in the past week. Same financialisation of essential commodities.

  3. I can’t understand that this is bad when I see prices moving towards sustainability. Isn’t that the goal?
    Are there charts that reflect underlying demand for these commodities or basket of commodities? Overlaying one on the other will surely provide a more telling picture.

    • The issue is that commodity prices represent a proxy for Australia’s foreign income, so a drop – even to “sustainable”/long-term levels – represents a drop in nominal income, which means bad things for the overall Australian economy.

    • Are there charts that reflect underlying demand for these commodities or basket of commodities

      For base metals you can follow stockpiles on LME, SHFE and Comex. Broadly speaking a build up of stocks means excess supply. The picture is a little bit complicated by a couple of things:

      A) Lots of dodgy behaviour in metals warehouses that has been documented over the last year. This induces a kind of artificial supply constraint to the market.

      B) SHFE is only for chinese entities. You need to follow stocks there while also following the LME/SHFE spread. i.e. SHFE stocks lack context without data about the spread.

      • indeed Lenny. Plenty of metals stored atm by investment banks and others using it as collateral against loans.

  4. Many thanks Prince. It shows how self-defeating QE2 was….all that cash manifesting in speculative demand for commodities.

    It won’t be long before the indices cross over again.

  5. Look at the price of OZL.AX RIO.AX as copper plays opposed to NCM.AX. Interesting? Gold diverges.

  6. My thesis on commodity prices is that most of the action in the last 10-12 years has been speculatively driven. The bank-lead housing bubbles and the State-lead investment bubble(s) in China have compressed many decades of future demand into just a few short years. This resulted in materials-scarcity and strong upward price pressure.

    However, demand for materials-intense bubble-goods (houses, railways, ports, roads, exportable consumables) is decaying. In the US, most of Europe, Japan and in this economy, bubble-ware is now on special.

    As supplies have already passed saturation point, production of new bubble-goods and the creation of new bubble-capital must also decline, and with that, demand for basic materials will inevitably crumble.

    Most of the on-going demand and output in the advanced economies is also not materials-intense. While (materials-intense) industrial production in advanced economies bounced back in 2009-11, it has not regained its former levels and is now starting to subside again.

    All of this bodes to a pronounced reduction in demand for and prices of basic materials. They should be expected to settle at their long-run trend real levels after first descending to new cyclical lows.

    This process of adjustment is likely to be intensified by the process of debt-liquidation that must occur before growth can resume. Debt liquidation is an analogue for saving, which in a globally integrated economy with unstable currencies, failed banking systems, derelict national accounts and declining growth, means USD accumulation. So we are going to see ongoing bidding for US-denominated assets and a corresponding destruction in the values of USD counter-weights.

    This is absolutely unavoidable imo.

  7. Truly, laissez-faire financial capitalism has created so many contradictory forces and stresses that the system is now fundamentally unstable. We saw in 2008 how vulnerable the real global economy is to seizures in even minor components of the financial markets. The situation is many times more perilous right now because the structural bulwarks in the system – sovereign finances – have been so badly damaged.

    • Briefly / A succinct overview – much appreciated. The link presuming a further flight to US denominated assetts i question, as the US would appear to be in no better financial shape than than most euro countries.
      Do you have any thoughts on where the demand/ price of gold fits into this ?


    • Have to agree. Ease of cross border capital flows due to rapid globalisation (and indeed a common currency in Europe) coupled with moral hazard due to ineffectual regulation (or in some cases removed regulations) has led to behaviour which has had consequences on a systemic level.

  8. I’m glad you like the modest contributions. I will see what I can do to expand my thinking and submit to MB. I am particularly interested in the role of debt creation/liquidation in economic processes. (Thanks for the invite, Prince.)

    Regarding the US, I think their finances look worse than they are, at least for the next decade or so. If they decided to tax themselves properly and ration their military spending, they could make their budgetary problems disappear. (The same applies here too.) Of course, the US have intractable problems in the real economy – a consequence of decades of excessive private debt creation, squandering and the mal-distribution of income – but the US is the only jurisdiction where capital can be protected in very large volumes. As a result, in a deflationary environment, USD-denominated financial assets will become the essential instruments for capital protection.

    (In a sense, US Treasuries are already the new bubble, their value propped up by public policy, a one-way deal for the market. This can only become more pronounced as the prices and longevity of other assets come under more pressure.)