Commodity Blog

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Time to Leave the Party? (Commodities Corner)

March 25, 2008 at 16:20 by Mario

It’s official.Commodity prices are no longer a safe one-way bet. Their resilience is waning as risk aversion takes the driver’s seat. Their saving grace? Investors are saying they’re still reluctant to be caught short.
Commodities prices have been in a tailspin as market participants began adopting the view that a fire sale of Bear Stearns (ticker: BSC) was only a precursor to scads more bad news in the financial sector. They were right.
Gold and copper areeach down 12% from the all-time highs seen on March 17 and March 6, respectively, while crude has fallen 11% from its March 17 high. London International Financial Futures Exchange sugar and cocoa are off 25% and 21%, respectively, from recent highs, while Chicago Board of Trade wheat has slipped nearly 20% since March 13. Still, prices mostly are above year-ago levels.
The exodus of investment money comes as hedge funds question whether the speculative premium in commodities, especially in metals, is such that long plays — bets that prices will rise — no longer justify the risk.
Says HSBC analyst James Steel: “The slump in commodity prices is evidence that investors are reassessing likely commodity-demand levels — and therefore also prices — after the recent run-up, with it no longer assured that commodity-price appreciation is a safe bet.”
Commodities have been attracting the largest share of investment lately. While it’s difficult to quantify the exact worth of this money flow, consensus estimates calculate that around $30 billion of fresh investment has entered commodities since the start of this year. Macquarie Bank says this potentially increases total investments in commodities by speculators in general to as much as $172 billion now, versus $142 billion at the end of 2007.
Despite the selloff, it would be wrong to suggest that commodity prices are in an irreversible downtrend; analysts say that it would take just one more banking disaster to trigger dollar weakness and a fresh round of buying in commodities, which now look comparatively cheap.
Gold, in particular, benefits at times of risk aversion, putting the precious metal into an altogether different bracket. And the scarcity of commodities, with products suffering from extremely low stocks, is set to attract investors when the dust settles.
This conundrum has left investors scratching their heads over what to do next. Few are willing to go short, lest they miss the boat if prices rally.
Observes UBS analyst John Reade: “The markets are still clearly in a binary mode, swinging from believing that either critical aspects of the international financial system will collapse and more banking failures are on the way, or this scenario will not materialize, and the process of gradual recovery has begun.”
The only thing that is certain is extreme volatility, analysts say. If a further decline occurs across several other asset classes, commodity positions run the risk of being liquidated to fund margin calls elsewhere. In the interim, brokers say the current wave of profit-taking is a healthy development.
From an intraday high of $1,017.50 set on March 17, Comex April gold futures tumbled 9.6%, to end the week at $920 an ounce. A rebounding dollar and heavy sales of gold futures by speculative funds were blamed for the drop, which marked an 8% dip from the previous week’s close. — Andrea Hotter is a commodities news editor for Dow Jones Newswires in London.

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