"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Wednesday, February 23, 2011

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.


  1. Dan,

    thank you for your insight.

    One word of caution about using the simple spread between CCI and CRB: As the CCI is currently at 662 and the CRB at 347 the percentage change in CCI has twice the effect as in the CRB. Think about what the graph would look like if you multiply all CCI-Values by 1000 and redraw the spread-chart - it would give no meaningfull information at all.

    A better way to check the spread would be to normalize the starting point of CCI and CRB both to 100 and then calculate the differences.

    Anyway the argument you made about the spread is still valid as the difference between the two is only a factor of 2 and still visible with normalization.

  2. @hiptwist

    I can understand your perspective in wanting to see a normalized chart, but I believe it's better to have the comparison with its weightings intact. I think Dan is using these index comparisons and there compositional differences to flesh out movement in the energy sector.

    Thanks Dan for putting great info out there for us to contemplate during these crazy times.


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