Is the Reuters/Jeffries CRB Index Missing the Commodity Bull?

Charts are one of the best tools to illustrate and compare financial data, but charts can also lead investors to false conclusions. That’s a particular risk when the data that goes into a chart is not consistent.

Zeal Research LLC recently identified the Reuters/Jeffries CRB Index as a good example of that risk, and Zeal makes a good case for the false conclusion by those who may have decided in 2006 that the bull market for commodities was losing momentum.

(Source: Reuters)

Here’s what happened: in July 2005 this closely watched index more than doubled its energy weighting (crude oil, natural gas, unleaded gasoline and heating oil) from 17.6 percent to 39 percent. You can see on the charts above just what that did to the CRB – energy became by far the dominant component, and as a result, metals and agricultural commodities carried less weight.

The above chart from Zeal shows how profound this change was for the CRB. The blue and red arrows on the lower left marks when the change occurred, with the continuing blue line representing the new CRB and the red line representing the index with its pre-July 2005 weightings. The “old” CRB is formally known as the Continuous Commodity Index, or CCI.

Almost from the beginning, the new CRB underperformed the CCI due to the higher energy weighting. In mid-2006, the spread between the two really started widening. The energy-heavy CRB moved mostly sideways from late 2006 to late 2007 before climbing nicely as oil moved toward $100 a barrel.

Meanwhile, even with periods of volatility, the CCI has clearly been on a tear due to the enduring strength of gold and copper on the metals side, and corn and wheat and other farm products. From July 2005 to the end of 2007, the CCI rose 52 percent, while the CRB was up only 14.7 percent.

Zeal Research’s Adam Hamilton concludes that the CCI is a better indicator of the secular bull market for commodities because its composition is more balanced.

To read Zeal’s article on the CRB vs. the CCI, click here

Comments

[Fred Mitchel]

The people that do these calculations must be the same ones who calculate the COLA for SS payments. Here in S. FL inflation for 2007 was 5.8%. Nationally it ran 4.1%. The SS COLA this year (2008) is 2.5%. How does this come to pass?