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Is the commodity selloff significant?

A friend asked me yesterday if I saw any signs of concern in the commodity markets. Could the broad-based decline in commodity prices in the past month be signaling an economic slump? Could the worries over Greek debt and the future of the euro be spilling over into another round of consumer and corporate retrenchment around the world?

So I pulled together these charts of various commodity prices and indices and updated them with the latest figures. I think the message of every one is basically the same: yes, there's been a bit of a selloff, but it doesn't look particularly large from an historical perspective, and prices remain relatively elevated. In the case of gold (last chart), the recent decline is almost undetectable, and gold is the commodity most likely to be driven by speculative (and forward-looking) activity. The CRB spot commodity index is probably the one least influenced by speculative activity (since only a few of its components have futures markets attached to them), but it too has suffered only a minor correction of late.

Meanwhile, the dollar has experienced a pretty significant rally in the past month, coincident with the modest selloff in commodities. This is not unusual at all, since the value of the dollar and commodity prices have been inversely correlated for a long time.

Faced with the uncertainty of Greece and the euro, investors have retreated to the safety of the dollar and gold. Commodities have experienced a modest correction as the dollar has climbed, because commodity prices almost always respond that way to changes in the value of the dollar. If there's anything that stands out here, it is that the correction in commodity prices looks quite tame relative to the change in the dollar. And that, when combined with the very strong performance of gold, suggests that global liquidity is still in abundant supply.

Equity investors have been spooked as well. But note the big jump in the Vix Index, actually the biggest since those awful days of late 2008 when it seemed that the whole international banking system was on the verge of collapse. The biggest thing impacting the markets right now is that old familiar nemesis: fear, uncertainty and doubt. The rise in FUD is much bigger than any physical or financial sign of economic deterioration.

Bottom line: the most likely explanation for what is going on is this: the market is climbing one more in a series of "walls of worry." Today's concerns will eventually pass, to be replaced by a renewed focus on the many signs of renewed global growth.

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