A Commodities Warning Signal

Commodities’ Biggest Drop Since Lehman Is Bear Signal (Update4)

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June 1 (Bloomberg) -- The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.

The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth.

Commodities extended their slump today, led by declines in industrial metals and energy prices, as separate reports showed manufacturing slowdowns last month in China, Europe and the U.S.

“As risk-taking falls, expected growth is reduced,” said Colin P. Fenton, the chief executive officer of Curium Capital Advisors LLC in Boston, who was a commodity analyst at Goldman Sachs Group Inc. and Stanley Druckenmiller’s Duquesne Capital Management LLC hedge fund. “Demand for commodities is going to be softer than it might otherwise have been.”

While the Organization for Economic Cooperation and Development raised its growth forecasts for this year and next on May 26, investors are dumping holdings at the fastest pace since February.

Sagging Demand

Raw materials may drop another 10 percent because the economy is on the “cusp” of deflation, said Philip Gotthelf, the president of Equidex Brokerage Group Inc. in Closter, New Jersey. That would drive the Reuters/Jefferies CRB Index of 19 commodity futures down 22 percent from a Jan. 6 peak and into what investors consider a bear market. The gauge plunged 8.2 percent in May, the most in 18 months.

Gotthelf correctly predicted in October 2008 that oil would fall below $40 a barrel and said he is now shorting most commodities and buying gold.

The CRB index fell 0.9 percent to 252.39 today. Nickel tumbled 4 percent, and crude oil dropped almost 2 percent.