Investors are fleeing commodities in another large exodus, reviving debate about whether the futures bubble has burst or is just going through a temporary contraction.
A steep drop in oil prices yesterday started the latest selling wave, and gold, silver, copper and wheat also posted huge losses.
"All of these markets seem to be going hand in hand. They pretty much turned around at the same time," said Darin Newsom, a senior analyst at DTN in Omaha, who called the speed of the pullback "startling."
Crude fell $5.75 to settle at $109.71 a barrel on the New York Mercantile Exchange after it appeared that Hurricane Gustav struck only a glancing blow to the Gulf of Mexico's offshore energy infrastructure. The sell-off in oil in turn dragged virtually every major commodity sharply lower as hedge funds and other large institutional investors raced to dump positions.
Precious metals prices quickly collapsed. Gold for December delivery fell as much as $40 an ounce on the Nymex before paring its losses to settle $24.70 lower at $810.50. In other Nymex trading, platinum prices lost $86.30, or 4.86 percent, to $1,403.50 an ounce, while silver shed 56.2 cents, or 3.6 percent, to $13.145 an ounce. Copper fell 11.4 cents, or 3.3 percent, to settle at $3.273 a pound.
"It's safe to say this is not a temporary shift," said Jon Nadler, an analyst at Kitco Bullion Dealers Montreal. "Perceptions about commodities have changed and people are just siphoning funds out."
The sell-off comes amid a flurry of bearish moves for commodities. A stronger dollar has eroded the appeal of commodities as a hedge against inflation. Fears of U.S. government oversight of commodities markets have also dampened investor enthusiasm. And a worldwide economic slowdown is weakening demand for copper, lead, aluminum and other industrial metals.
But the declines will give consumers hit by rising food and energy costs only limited relief: Although gasoline prices have come down as crude falls, food prices at the grocery aisle have been slower to drop as food companies work through more-expensive raw materials.
Nonetheless, weaker appetite for commodities has taken a toll in mineral-rich places such as Australia, which cut interest rates yesterday for the first time in nearly seven years in an effort to kick-start economic growth.
It's a stark turnaround from only a few months ago, when prices for oil, gold and grains were touching record highs, driven up by weakness in U.S. currency and seemingly relentless demand for raw materials.
Analysts are split over whether commodities are in the throes of a protracted decline or are simply hibernating before the next boom. Some market watchers say that historic run-ups in oil, precious metals and agriculture prices in the first part of the year were mainly speculative-driven rallies that were detached from fundamental supply and demand.
In a report last month, Deutsche Bank predicted that oil prices would fall back to the "marginal production cost" -- around $60 to $80 a barrel -- and that gold would slip below $700 an ounce. It advised clients to take profits now before prices fall further.
"The market was certainly ripe for the kind of correction we're seeing," said Stephen Platt, an analyst with Archer Financial Services, noting the frenzied "anxiety" about commodity shortages that initially sent prices higher.
Still, he and others expressed doubt about whether commodities have truly hit a top.
Surging population growth and rising income levels in developing countries, particularly China and India, are expected to spur demand for food, fuel and other goods, potentially thrusting the world into a period of chronic shortages.
At an investment conference in Asia late last month, Jim Rogers, an influential commodities trader, said that futures were in the middle of a long-term bull market and predicted that oil prices could hit $175 a barrel in the future.
Goldman Sachs has also said it expects oil to surge back toward $150 by year's end.
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