Source: Commodity Research Bureau.

CRB Index (CCI), Monthly Close, 1970-2009

The �RJ/CRB� is a composite index (also known as the Continuous Commodity Index; CCI) of 19 commodity futures prices, including Aluminum (6%), Cocoa (5%), Coffee (5%), Copper (6%), Corn (6%), Cotton (5%), Crude oil (23%), Gold (6%), Heating oil (5%), Lean Hogs (1%), Live cattle (6%), Natural Gas (6%), Nickel (1%), Orange juice (1%), Silver (1%), Soy beans (6%), Sugar (5%), Unleaded Gas (5%), and Wheat (1%). The index was originally developed in 1957 and continues to be one of the most often cited indicators of general commodity prices. Outside periods of strong inflation, the CRB index follows a deflationary trend. In the period before 1971, the CRB remained remarkably stable showing little variations since its inception in 1957. Since then, the CRB underwent three major inflationary cycles and three major corrective (deflationary) cycles:

• Inflation wave A. In 1971 the convertibility of the US dollar in gold was abandoned, followed by Great Britain and other industrialized nations. The stage was set to rampant inflation which would lead to the deep recession of the early 1980s. Additionally, in an embargo imposed by OPEC resulted in the First Oil Shock, which saw oil prices quadruple. Between 1972 and 1974 the CRB more than doubled.
• Counter wave I. Once the First Oil Shock over, a re-equilibrium took place with a period of instability and stagflation, as evidenced in the wide volatility of the CRB. Interest rates were dropped, which set the stage for the second inflationary wave.
• Inflation wave B. The second major inflationary cycle began with the Iranian Revolution of 1979 and the disruption of oil production in the Persian Gulf. Oil prices essentially tripled with strong spillover effect on other commodities, with the CRB increasing by a factor of 1.5.
• Counter wave II. The intervention of the Federal Reserve in 1980 with a substantial increase of interest rates to lower the strong inflationary pressures as well as existing high commodity prices triggered a deep recession which had strong deflationary effects on commodities (1). The following 20 years (II) involved cycles of growth and recession but an overall deflationary trend on the price of commodities, particularly with the Asia Financial crisis of 1998 (4). The relative price of commodities, namely oil, substantially declined, in part due to technological improvements in extraction processes. The 1981-2002 deflationary cycle (II) is an indication of the surplus capacity brought by previous inflationary periods (particularly wave B) as well as technological improvements enabling a more efficient production of commodities.
• Inflation wave C. This inflationary cycle was excessively unusual in terms of its scale and duration (from 2001 to 2008). Following the collapse of the technology stock bubble in 2000 (5) and the events of September 11 2001, the Federal Reserve lowered interest rates at their lowest level in a generation; as low as 1%. The rate, compared with inflation, was essentially negative. A large amount of credit was issued in light of the setting of deflationary pressures. This triggered the largest asset inflation in human history, mostly in real estate (the real estate bubble). The material demands the construction boom created substantially increased commodity prices and also supported accelerated levels of industrialization in developing countries, namely China, which also boosted demands in the commodity sector. The Federal Reserve can have a level of control over monetary supply but cannot influence where the capital accumulates. By 2005, a substantial amount of capital started to spill over the commodity sector with staggering inflationary effects. The CRB tripled in 6 years. The debasement of the US dollar in relation to other currencies, particularly the Euro, has also contributed to commodity price inflation.
• Counter wave III. As extensive as inflation wave C was, the correction of counter wave III, which began in the second half of 2008, is even more significant by its volatility. In many ways it is a logical conclusion of the previous inflation wave and the staggering level of debt and capital misallocations it became associated with. The collapse of leveraged inflated assets, particularly real estate, resulted in a paradigm shift in the global financial sector. Many financial instruments, commonly mortgage-based, were forced to be re-priced, triggering a wave of defaults since assets could no longer be reconciled with liabilities. Abundant credit suddenly became scarce as financial institutions were reluctant to extend credit, unsure about who will default next, thus the �credit crunch�. This quickly spread to the commodity sector with a substantial correction in prices and a strong deflationary trend linked with global demand destruction. Since we are in the early stages of this correction, it remains uncertain about its impact on the CRB index, but a correction of a least 50% can be expected. It is an assumption that the pattern experienced in the 1970s (counter-cycle II) is to be repeated in over the following years as counter cycle wave III.