naked capitalism

We had observed that commodities prices looked overbought, historically fell during recessions, and in recent years had been strongly influenced by emerging market demand, which looked vulnerable to a US slowdown. These observations have proven out much sooner than we anticipated. Commodities continued their fall today.

From Bloomberg;

Gold headed for its biggest weekly drop in 25 years, leading a drop in commodity prices, after the dollar rallied and concern mounted a U.S.-led slowdown in the global economy will reduce consumption of raw materials.

Oil fell below $100 a barrel for the first time since March 5, soybeans erased this year’s gains and cocoa headed for its steepest decline since at least 1986. The UBS Bloomberg Constant Maturity Commodity Index, down 3.2 percent as of 9:30 a.m. in New York, is having its worst week since at least 1997, led by declines in silver, cocoa and sugar.

“Global recession fears are causing selling pressure in all commodities,” said James Mound, head analyst for MoundReport.com, a commodities newsletter, in Palm Coast, Florida. “The markets are focusing on want-based items instead of need-based items.”

Gold in London has plunged 11 percent from its record $1,032.70 an ounce on March 17 after the Federal Reserve cut its overnight-lending rate less than expected by 75 basis points to 2.25 percent. The dollar has recovered 3 percent from an all-time low against the euro and rallied almost 4 percent from a 12-year low against the yen.

Commodities have advanced in each of the past six years, driven by demand from China seeking to feed its population and power its expanding economy. The dollar’s slide has boosted demand for raw materials, which become cheaper for buyers holding other currencies, while some investors are seeking higher returns following a slump in equities.

The money flowing into commodities is “absolutely enormous,” James Proudlock, commodity product head for Europe, Middle East and Asia at JPMorgan Securities Ltd., said at a sugar conference yesterday in Geneva.

There are 361 commodity funds that had $98 billion in assets as of Feb. 28, compared with 345 funds with $80 billion at the end of 2007, he said.

The rally, according to Paul Touradji of the $3.5 billion hedge fund Touradji Capital Management LP, was a “buying orgy” that had inflated prices and increased the risks of a collapse.

Commodities “have all gone parabolically higher on frenzied money flow,” New York-based Touradji wrote to clients March 10. “Unless that money flow continues ad infinitum, in which case prices would go to infinity, then the fundamentals had better be improving as quickly as prices have been, otherwise there is nothing else to keep the markets at these levels.”….

“A protracted slowdown is ultimately not good for commodities as people won’t have enough money to buy anything,” said Hong Kong-based Dick Poon, manager of the precious metals trading desk at Heraeus Ltd., a unit of processor Heraeus Holding GmbH in Germany.

Gold for immediate delivery dropped as much as 4.1 percent to $905.41 an ounce, the lowest since Feb. 19, and traded at $917.20 as of 1:30 p.m. in London. The metal’s 8.3 percent drop this week would be the biggest since March 1983. The U.K. and U.S. are on holiday tomorrow.

Gold may slump to $840 by April, said Michael Lewis, Deutsche Bank AG’s head of commodities research in London.

Gold futures for April delivery fell $28, or 3 percent, to $917.30 an ounce on the Comex division of the New York Mercantile Exchange.

Oil soared to a record this year even as analysts forecast that consumption would increase less than in 2007. Crude oil for May delivery fell as much as $3.62, or 3.5 percent, to $98.92 a barrel on the New York Mercantile Exchange, and traded at $99.70.

U.S. prices are likely to fall toward $90 a barrel this spring as the country’s slowing economy encourages traders to exit commodity markets, Goldman Sachs Group Inc. analysts including Jeffrey Currie wrote in a report today. Deutsche Bank’s Lewis said prices will be $90 by next month.

“The oil price slump along with all the other commodities resulted from the dollar staging a rally, so the large funds flowed out of the commodities complex,” said Victor Shum, senior principal at consultants Purvin & Gertz Inc. in Singapore. “Investors have found a trigger to focus more on fundamentals.”

Copper declined to its lowest in a month on the London Metal Exchange on concern the reduction in borrowing costs won’t stop the U.S. from slipping into a recession. Corn and soybean futures in Chicago extended losses as the dollar’s rally reduced the appeal of commodities as an alternative investment.

Cocoa futures for May delivery dropped as much as $274, or 11 percent, to $2,259 a metric ton on ICE Futures U.S., the former New York Board of Trade.