CRB Index versus the Continuous Commodity Index

Most of those who have followed my writings over the years are aware of the fact that I make frequent references to the CCI or Continuous Commodity Index when detailing the performance of the overall commodity sector.

The reason for this is simple - I prefer the well balanced weighting of the various basket of commodities that comprises the CCI to give a better view of the commodity sector in general when attempting to gauge its performance.

The CRB on the other hand is heavily weighted in the energy component. There is nothing wrong with this as this is the deliberate choice of the those who designed this particular index. They felt that because energy costs had such a significant impact on so many areas of the economy, that any view of the commodity sector's performance should include an index that put a greater emphasis on the role of energy when constructing that index.

I have often commented that those analysts who were citing the CRB when giving their views on commodity price inflation were doing their readers or listeners a disservice because the index was so heavily weighted in energies, that it was giving a lopsided representation of what was happening in the food and metals sector whenever the price of crude oil was lagging, as has been the case for some time now.

I still maintain that view; however, there is a use of the CRB index that I have found helpful in examining the commodity sector as a whole particularly in attempting to gauge the thinking of the large scale speculative community when it comes to money flows.

The following chart is a spread between the CRB index and the CCI. If you will note, the general tenor of this chart has been a decline that began in late 2008 and has continued for the most part until the present time. The reason for this is simple - back in 2008 crude oil reached the dizzying height of nearly $150 barrel before it began a sharp collapse. That collapse in price was magnified when compared to the rest of the sector as a whole which while it too moved lower, did not fall from such stratospheric heights as did crude oil.

In other words, the CRB was underperforming the broader CCI telling us that within the broad commodity sector, crude oil and the liquid energies in general, were out of favor by the hedge fund community in comparison to the food and metals segment of this sector.

As long as this line moved lower, the energy sector of the commodity complex was not viewed as attractive as a place into which to plow money as the food and metals.

Given the fact that we are now seeing sweeping unrest across the oil exporting Middle East with the resultant surge in oil and liquid energy prices, the CRB index can be expected to outperform the CCI IF the hedge fund community is now beginning the process of investing more heavily in this segment of the commodity sector and lightening up a bit on their exposure to the foods, softs and metals. This is not to suggest that those just mentioned segments are about to undergo declines. Quite the contrary - we all can see what silver is doing for example along with some other markets such as cocoa and hogs. However, what might possibly be the start of a new trend is that the energies are finally going to become the recipients of a great deal of fresh money flows that could help this sector play catch up to the rest of the commodity world.

If that is indeed the case, this spread will confirm it by moving higher and reversing the downtrend that has been in place for 29 - 30 months. Quite simply, the liquid energy markets have been badly lagging and have a lot of ground to make up.

Stay tuned on this one because it will depend on what else transpires across the middle East.