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How to understand CRB index (Part 2)

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The Commodity Research Bureau Index CRB measures the overall direction of commodity sector such as energy, metals, agriculture products, ect. It is an index that tracks a basket of commodities to measure their performance. In this topic, we study CRB Index as well as its correlations with other important asset classes.

Categories


The original CRB index included 28 commodities until the list was reduced to 21 in 1987 and further cut down to 17 commodities in 1995. The consituents in a CRB can be grouped into the following categories: Energy( Oil, Coal, Nature gas...), Metals (copper, Gold, silver, Nickel), Agriculture (Coffee, Cocoa, Sugar, Wheat, Soybeans...). CRB Index was renamed as the Reuters/Jefferies CRB Index in July 2005, which was a result of the collaborative effort of Reuters Plc and Jefferies Financial Products.

Goldman Sachs Commodity Index GSCI


The GSCI was created in 1991. It is heavily weighted in energy future contracts, which consittude 72.5% of the index compared with only 39% for the Reuters/ Jefferies CRB Index. Hence, the GSCI is more sensitive to cude oil prices than CRB Index.

Correlation


CRB Index moves in the same direction with bond yields and opposite to bond prices. Rising commoditiy prices signal rising inflation pressure, which put upward pressure on interest rates. Then it puts upward pressure on bond yields and downward on bond prices. The second correlation is the USD Dollar index trends in the opposite direction of commodities.