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While the global commodity markets turned considerably lower during the third quarter of 2011, we do not believe that a sustained drop in commodity prices is likely. Worldwide demographic trends will continue to place supply pressures on several commodity types, notably food and energy, while increased market volatility will likely result in continued investor appetites for precious metals.

Elevated levels of commodity prices remain as a concern to us, at Hennion & Walsh, as it puts further stress on already strained U.S. consumers. It also reaffirms our belief that inflation is not necessarily just waiting in the wings, but now is starting to rear its ugly head in places like agricultural and metal based commodities.

Despite our beliefs, commodity markets suffered severe losses during the third quarter, particularly in September, due to two primary factors based on our research and analysis:

1) Concerns over an increasing likelihood of a prolonged economic slowdown

2) Equity market volatility leading certain investors to have to sell assets that have gained in value (Ex. commodities) to cover margin calls on assets that have lost value (Ex. stocks)

For the quarter, the Thomson Reuters/Jefferies CRB commodities index fell 11.8% - falling by 12.97% in September alone! Silver (a precious metal) and Copper (an industrial metal) were particularly hard hit during the final four weeks of the quarter as Silver lost 27.86% and Copper lost 24.89% during the month of September. Gold was not impervious to the onslaught in the commodity pits as even Gold fell 11.42% during the month of September - after reaching an all-time high level of $1,923.70 per ounce on September 6, 2011. Despite the difficult September, Gold still closed higher for the quarter by 7.8% and remains higher by 14% on a year-to-date basis. If this gain holds for the final quarter of the year, which we believe it will, it will mark the eleventh consecutive year of gains for this particular precious metal. Once viewed as an inflation hedging vehicle, Gold is now viewed by many investors as a “flight to quality” trade alternative during volatile markets in a similar fashion to the manner in which U.S. Treasuries were/are viewed in these environments.

We often look to the Exchange Traded Product (ETP) marketplace to gain a sense for how the various commodity markets are performing. Hence, we provide the chart below which shows the 2011 Year-to-Date (YTD), 1 Year and 3 Year performances, in addition to their associated volatilities as measured by standard deviation, of a few of these selected commodity ETPs:

ETP Name

Ticker

2011 YTD Return %

1 Year Return %

3 Year Return %

3 Year
Standard Deviation

SPDR Gold Shares

GLD

13.94%

23.57%

22.94%

22.06%

iShares Silver Trust

SLV

-4.21%

35.66%

34.81%

44.05%

PowerShares DB Base Metals

DBB

-24.07%

-15.30%

-1.15%

31.17%

PowerShares DB Agriculture

DBA

-8.30%

7.95%

-0.08%

20.34%

United States Oil

USO

-21.82%

-12.49%

-28.09%

37.52%

United States Gasoline

UGA

9.11%

34.84%

-2.29%

40.78%

United States Natural Gas

UNG

-24.85%

-27.00%

-48.66%

37.95%

iPath DJ-UBS Commodity Index TR ETN

DJP

-15.02%

-1.28%

-6.79%

22.99%

Source: Morningstar as of September 30, 2011. Past performance is not indicative of future results.

Disclosure: Hennion & Walsh Asset Management currently has allocations within its managed money program to PowerShares DB Agriculture (NYSEARCA:DBA).

Source: Is The Commodities Bull Run Over?