Commodities trend followers got slapped by an abrupt strengthening of the dollar in January, which sent commodities prices plummeting and delivered the worst month for the AR Commodities Index since the notorious losses of June 2008 that presaged that autumn's equity and credit market meltdown.
The AR Managed Futures Index, which includes funds with commodities exposure, fell 1.6% in January, while the more focused AR Commodities Index fell 1.73% that month. That's the biggest decline since the index's 5.02% loss in July 2008—the worst month for the index since AR began gathering data in 1998.
Commodities funds suffered when the strong inverse correlation between the dollar and commodities suddenly reversed polarity in mid-January. News that Greece could require a bailout from the European Union pummeled the euro and resulted in a dollar rally of 2.1% for the month.
That rally led to declines in most major commodities. Crude oil dropped 8.2% in January to $72.89 a barrel. Copper dropped nearly 9%. Gold lost 1.1%, which was particularly unpleasant for investors in John Paulson's new gold fund, which dropped 14%. The fund invests in gold futures, stocks and derivatives.
The question now is whether the trend followers will have suffered a similar fate in February after shifting to a strong dollar/weak commodity position, only to watch the dollar remain range bound while commodities bounced back above their 2009 yearend levels. Having been down as much as 3.48% on February 5, the CRB Index of commodities was, as of February 22, 0.340% over its December 31, 2009 price. Since trend followers wait for a clear pattern to emerge before committing capital, this sudden change in correlation could have caught some off guard. —Josh Friedlander
