Commodities Plunge Continues

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, 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.

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  1. S

    Rumors floating around the Fed has hinted that P/B need to raise margin requirements. Rumors abound these days. If true it makes sense in the coordinated assault. This appears to be a frontal on the inflation trade and one has to assume that the long statement (FOMC) was the opening salvo. The stornger dollar it would seem is starting to be in everyone’s interest at the moment. Breaking the trade gives Fed grounds for declaring the inflation genie bottled if they can revert prices to at least to 2nd half ’07 levels (using oil 70-80 level). Headline numbers are suddenly benign (despite much higher prices). More room to cut as futures pricing in 50 bps by June. Timing seems awefully proitious. Much more efficent way than wading into the very deep Fx market. look out for the unitended consequences for ratcheting back the leverage per Wolf’s article.

  2. Anonymous

    If I were an insolvent investor with access to large amounts of cheap liquidity (thanks Ben), the temptation would be enormous to try to fix my solvency problem in part by making some quick cash pumping and then dumping commodities.

  3. Anonymous

    IMHO, commodities will spike again and follow other related hedges that are playing off volatility:

    There is a dis-connect going on and it almost seems like a harmonic disruption of some kind, like an earthquake or stress load problem. The idea of systemic collapse may be like a building falling down….

    The benchmark for American equities has advanced or declined 1 percent or more on 28 days this year. That’s 52 percent of the trading sessions so far, which is the highest proportion since 1938, said Howard Silverblatt, S&P’s senior index analyst. The S&P 500 lost 12 percent in 2008 through yesterday following $195 billion in bank losses related to subprime mortgages.

    That is even more interesting if you connect volatility to an overvalued S&P 500 and this:

    >>>>The rate on the three-month bill, viewed by investors as a haven in times of trouble, dropped 32 basis points, or 0.32 percentage point, to 0.56 percent at 5:30 p.m. in New York, according to bond broker Cantor Fitzgerald LP. It’s the lowest level since May 1958.

  4. Anonymous

    IMO, the entire financial market structure is synthetic, dominated by the same unregulated shadow system that the Fed allowed to bankrupt the country. The futures markets are their special preserve. More akin to a price fixing mechanism than price discovery.

    If the gutless Fed really wants to start somewhere and mete out some delicious, risk free punishment, kick some ass in the commodities futures. We’ll all buy popcorn and cheer.

  5. Yves Smith

    They had the opportunity to do so (James Hamilton argued for this) via cutting Fed funds only 25 or 50 basis points. That would have kicked a lot of commodities speculators in the head.

    The fact that a mere 25 basis points less than an expected (and unprecedented) 100 basis point cut produced this big a retreat says there is a lot of froth in these markets.

  6. doc holiday

    1. Margin Calls

    Bills have also gained as volatility in higher-yielding assets caused lenders to increase margin calls, or collateral requirements, on loans, according to Prudential’s Tully. “We’ve been so volatile lately that there’s been a lot of need for collateral,” he said. “Treasury bills are the margin of choice.”

    2. we had 50 year low yield on the 3 month treasury.

    we had the highest VIV– volatility in 70 years today

    And now….

    Commodities plunged, capping the biggest weekly drop in five decades, on speculation that slower global growth will curb demand for energy, metals and grains.

    The Reuters/Jefferies CRB Index of 19 commodities tumbled 8.3 percent this week, marking the steepest drop since at least 1956. After reaching records this week, gold plummeted as much as $129 an ounce and crude oil tumbled more than $13 a barrel.

    This has really turned into infomomics or is that enternomics, well, a cross between soap operas and casinos

  7. Anonymous

    Not everyone is convinced that Bernanke has managed to turn the tide for financial firms.

    “He has taken extraordinary measures, things that we haven’t seen since the Great Depression,” said former Fed vice chairman Alan Blinder, a Princeton University professor. “He’s working overtime, literally and figuratively, to get this panic under control. But so far, it’s not under control.”

    U.S. Treasury three-month bill rates dropped to the lowest since at least 1954 yesterday as investors sought the safety of government debt. Bill rates declined as low as 0.387 percent as finance company CIT Group Inc. drew on $7.3 billion in credit lines after being shut out of short-term debt markets.

    “This is all about money,” said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois, who has been trading gold since 1973. “The Fed can control the price of money but the banks still don’t want to lend.”

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