Commodities, Stock in Lock Step

from WSJ:
As stocks retreated and recovered in the past 15 months, commodities investments moved in step with the U.S. market.
That wasn't supposed to happen.
Investing in commodities long has been pushed as a useful way to cushion portfolio risk. "We haven't seen the independence [in commodities returns] that you'd hope for in a diversified portfolio," says Jay Feuerstein, chief executive of Chicago commodity-trading adviser 2100 Xenon Group.
Last year, commodities such as oil, corn, copper and grain crumbled as the stock market tanked. This year, they have climbed in tandem with stocks. And the performance of commodities mutual funds has striking parallels to the broad U.S. stock market.
Funds that track the benchmark Standard & Poor's 500-stock-index have risen 26% this year, while commodities funds are up about 22%, according to fund-tracker Lipper Inc. In the past three years, the S&P funds have posted an average annualized decline of 6.6%; commodities funds fell 7.3% on average.
The only spots among commodities to provide diversification have been gold and silver. Gold funds returned 10.6% on average in the three-year period.
"Everyone thought that if you invest in long-only commodities, you'd get diversification, but that's not the case," said Nadia Papagiannis, alternative-investments strategist at investment researcher Morningstar Inc. "We found out last year that they were very highly correlated [to stocks]."
Based on the theory that stocks and commodities are poles apart, the fund industry churned out new commodities funds. More than half of the commodities mutual funds and exchange-traded funds on the market have been introduced since the start of 2008, and investors have socked increasingly large amounts of cash into them.
Of the 85 commodities mutual funds, ETFs and exchange-traded notes, 42 came to market last year, and five were launched this year through Oct. 31, according to research firm Strategic Insight. Through Oct. 31, more than 7% of inflows into stock funds and ETFs—$27.5 billion—went to commodities funds, says Strategic Insight.
The unusually severe nature of the 2008-early 2009 financial crisis is the cause of the stock-commodities convergence. The credit crunch caused a near-unprecedented liquidity squeeze. In other words, investors were too scared to buy anything.
As such, commodity values fell in near-lockstep with stock prices.
From Sept. 1 to Dec. 31, 2008, as the S&P 500 plunged 30%, oil fell 66%, corn dropped 28% and copper was down 62%.
Gold held up as a diversifier. While the precious metal's price fell 17% in October 2008—the same as the S&P 500—it was up in September, November and December, and finished the September-to-December period up 6.6%.
Given gold's recent performance, Ms. Papagiannis says holding the commodity itself is a good diversifier. Several funds own physical gold—as opposed to futures contracts—the largest of which is SPDR Gold Trust ETF. Since silver has also performed as a diversifier, similar to gold, another alternative is an ETF that holds physical silver, like iShares Silver Trust.
Mr. Feuerstein, the Chicago trading adviser, suggests a different reason for investing in commodities: Because they are likely to go up. "Don't think in terms of diversification, but think of it as just a great opportunity," he says.
The downside, Mr. Feuerstein noted, is that if a market-moving event sends stocks plunging, commodities will follow. Just like before.