Commodity Prices Reverse Sharply

Commodity prices are falling sharply after many indexes hit new records yesterday. The cause was the belated realization that growth will be falling, easing demand for raw materials.

Most observers believe the long-term outlook for commodity prices is strong, but the market looked badly overbought of late.

From Bloomberg:

Commodities plunged the most in almost six weeks, as oil, gold and corn fell from record highs, on renewed concern that a slowing U.S. economy will curb demand for raw materials.

The UBS Bloomberg Constant Maturity Commodity Index of 26 futures contracts fell 25.2792, or 1.6 percent, to 1,512.032 at 1 p.m. in New York. A close at that price would be the biggest decline since Jan. 23, halting a rally that sent the index up 20 percent this year and to a record high on Feb. 29.

Demand for everything from gasoline to copper to food may slow as inflation accelerates, loan defaults rise and the U.S. housing market deteriorates, said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. “Further declines in house prices are likely,” Federal Reserve Chairman Ben S. Bernanke said today.

“If the U.S. continues to slow, it’s not going to bode well for the supply and demand picture of these commodities,” O’Neill said. “Every time Bernanke speaks, the negativity about the U.S. economy comes forward.”….

Commodities have surged this year, beating gains in stocks and bonds, as a slumping dollar and lower interest rates sparked demand for a hedge against inflation. U.S. consumer prices rose 4.1 percent last year, the fastest pace since 1990. The Fed has cut interest rates five times since September to avoid a recession, and speculators say more reductions are likely.

Before today, the UBS Bloomberg index gained 20 percent this year. The Standard & Poor’s 500 Index has declined more than 10 percent in 2008…..

Oil, gasoline and heating oil fell from records on signs that the Organization of Petroleum Exporting Countries will leave production targets unchanged when ministers meet tomorrow.

Crude-oil futures for April delivery slipped 2.1 percent to $100.27 a barrel today on the New York Mercantile Exchange. The price touched $103.95 yesterday, the highest ever.

Gold fell as lower energy prices eroded the metal’s appeal as an inflation hedge. The metal for April delivery dropped 1.7 percent to $967.50 an ounce after reaching a record $992 yesterday.

Corn fell for the first time in four sessions on speculation that overseas demand and U.S. animal-feed consumption will slow, after prices reached a record $5.7375 a bushel yesterday. Corn futures for May delivery fell as much as 1.9 percent to $5.56 a bushel on the Chicago Board of Trade.

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  1. Anonymous

    Purge warning!!!!


    >>>(*Because appointments of members are staggered there are currently only five members on the board.)
    All current members of the Board of Governors have taken office during the presidency of George W. Bush.

  2. Anonymous

    Actually it started in the soft commodity markets on rumours the Chinese Govt was going to intervene to stem the rise in the soyoil market according to some informed traders. Selling there spilled over, hitting stops across the commodity complex and cascade downward they went. Sharp, short term and temporary. Alot of shorts were covering today on this move.

  3. Anonymous

    forgot to add, so that bloomberg piece isn’t worth using it in the men’s room. Typical though, they need to fill vacant air space thinking they sound smart. Comical.

  4. Yves Smith

    Last night, since I post in the middle of the night, I noticed that pretty much all commodities that trade then were down, but not by all that much at that point. Makes perfect sense that there was a trigger.

    I am the first to grant that Bloomberg isn’t a top pick for analysis. But 3/4 of the time, they’ll be out with news before the other services.

    And if they get lucky, one of their sources will say something useful.

  5. doc purge holiday

    No matter the trigger, the commodities market needs to melt along with bonds, stocks and all the fun with ABX trash, because, otherwise, an overheated commodities market would fuel hyperinflation. Ill be very grateful if commodities speculation is snuffed out ASAP and these speculators all go belly up!

    I would also like to see The Fed purged of these types of nepotistic plants that should be in school learning about economics and math, versus running America into the trash can!

    Warsh, 35, who has served on Bush’s National Economic Council for the past four years, is a special assistant to the president for economic policy.

    I guess I have a lot of other hopes also, like to see more photos of bunnies rubbing noses; can we have one of some Playboy Bunnies this time, instead of the little critters?

  6. CTMM

    um… ok, but what if the peak oil guys are right, and the oil price run-up is driven by declining supply? Then you’d still have oil price increases even with falling demand.

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