According to a report from the Wall Street Journal,"last year was, on average, another one to forget for investors in raw materials: The Dow Jones- UBS Commodity index fell 10% against a 24% increase in the MSCI World Index of stocks. But those trends reversed in January. The MSCI index finished the month down 3.7%, while the DJ-UBS index eked out a slight gain".
But as rallies go, this one is at best a two-horse race. It is fortunate for investors in the DJ-UBS that its biggest component, weighing in at nearly 14.5%, is U.S. natural gas. Near-term gas futures returned about 18% in January amid America's big freeze.
Coming in a distant second, adjusted for its weighting in the index, is gold. After a dreadful 2013, when gold returned a negative 29%, it added 3% in January as fears around emerging markets took hold. As the third-largest component in the DJ-UBS index, that adds an appreciable bump, even if much smaller than that of gas.
While another seven commodities have gained so far this year, mostly agricultural, their weightings are all so small that they barely move the needle. And then there are 13 that have all fallen, including some index heavyweights like oil and copper.
Despite being in the green, therefore, the underlying message of the DJ-UBS so far in 2014 isn't encouraging.
Cold weather is, after all, transient. Despite more heavy snow hitting the Northeast Monday, gas futures were down. The near-month contract has fallen by about 10% since the middle of last week and longer-term futures remain flat. Gold, meanwhile, could continue benefiting from the fear trade. But it faces a sizeable and continuing headwind in the shape of the Federal Reserve scaling back its bond-buying program.
Those commodities tied more closely to global economic activity—oil and industrial metals—add up to almost 42% of the DJ-UBS index and, nickel's slight gain aside, are uniformly in the red. Worries about emerging markets, especially China's soft economic indicators—weak again on Monday—clearly weigh heavily. But so does fear of supply outpacing demand as the lagged effect of earlier investment catches up for the likes of oil and copper.
