Commodity prices slump as investors seek dollar safety

September 24, 2011 | 09:02
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Commodity prices tumbled this week, mirroring the situation on global stock markets, as fears of a new worldwide recession amid a worsening eurozone debt crisis saw investors seek refuge in the dollar.

The US Federal Reserve on Wednesday warned of significant downside risks to the American economy, sparking a fierce selloff on global markets.

G20 leaders meanwhile urged the eurozone to tackle its debt crisis to prevent contagion spreading across the world, while similar warnings were sounded by the European Central Bank, the World Bank and the International Monetary Fund.

Recession fears were also stoked by poor economic data in China and the eurozone -- which is already plagued with the rampant debt crisis among its peripheral nations like Greece, Ireland and Portugal.

Added to the mix was the re-emergence of a bitter and domestic political feud to try and raise Washington's debt ceiling.

PRECIOUS METALS: Gold prices slumped to below $1,700 an ounce, despite the precious metal's status as a safe-haven investment in times of economic turbulence.

Gold had hit a record high of $1,921.15 an ounce on September 6.

"The recent sharp falls in the dollar price of gold have led some to question its status as a refuge from problems elsewhere, especially now that the US currency is strengthening across the board," said Julian Jessop, chief economist at the Capital Economics consultancy.

"The recent fall in the dollar price of gold primarily reflects a return of a degree of confidence in the US currency, which may not be sustained. The price in euro terms, for example, has held up a little better, which is what matters more for European investors seeking protection from the crisis in the eurozone."

A stronger US currency makes dollar-priced raw materials like gold and oil more expensive to holders of other currencies, thereby softening demand.

By late Friday on the London Bullion Market, gold plunged to $1,689 an ounce from $1,794 the previous week.

Silver dived to $32.90 an ounce from $39.97.

On the London Platinum and Palladium Market, platinum retreated to $1,651 an ounce from $1,798.

Palladium decreased to $659 an ounce from $732.

OIL: World oil prices slumped on fears of a fresh global economic downturn which would slash global demand for energy, with New York crude diving by more than five dollars on Thursday alone.

"Oil prices have been on a very gradual downward trend since April and have been brought down by the continuous poor economic reports, from the US, eurozone and China," said Nick Campbell, an analyst at energy consultancy Inenco.

"This week, the spotlight has been on the US Federal Reserve and the G20 meeting to provide confidence to the market, and there were expectations of further monetary policy from the US and eurozone to boost economic growth.

"Unfortunately the announcements from both parties have had the opposite effect," he added.

The US Federal Reserve on Wednesday unveiled a $400-billion stimulus plan to reduce long-term interest rates but investors chose to focus on its warning about the outlook for the world's biggest economy and oil consumer.

The Fed painted a grim picture of the economy, strapped with slow growth, high unemployment and a depressed housing market.

"There are significant downside risks to the economic outlook, including strains in global financial markets," the central bank said.

The United States has yet to fully recover from the 2009 recession, which was the country's worst since the Great Depression in the 1930s.

By late Friday on London's Intercontinental Exchange, Brent North Sea crude for delivery in November retreated to $104.60 a barrel from $113.43 a week earlier.

On the New York Mercantile Exchange, West Texas Intermediate (WTI) or light sweet crude for November, dropped to $80 a barrel from $88.11.

BASE METALS: Copper prices tumbled to a 13-month low under $8,000 an ounce, extending their run lower since reaching record highs in February, as weaker Chinese manufacturing data added to global demand concerns.

Aluminium, lead, tin and zinc also hit their lowest levels for around a year, while nickel struck a near two-year trough.

On the London Metal Exchange, copper for delivery in three months struck $7,115 a tonne -- the lowest level since August, 2010.

Copper prices have slumped 30 per cent since hitting a record-high $10,190 a tonne on February 15, when markets were extremely optimistic about economic recovery.

However in recent months the outlook for growth has turned extremely sour and was further dented on Thursday when data showed that manufacturing activity in commodities-hungry China contracted for a third month running in September.

The HSBC preliminary purchasing managers' index (PMI) fell to a two-month low of 49.4 in September from a final reading of 49.9 in August, the British banking giant said in a statement.

A reading above 50 indicates the sector is expanding, while a reading below 50 suggests contraction.

"On the back of the plentiful bearish news and the further rise of risk aversion, it is not surprising that metal prices have come under strong pressure," Commerzbank analyst Daniel Briesemann said on Thursday.

By late Friday on the London Metal Exchange (LME), copper for delivery in three months dived to $7,488 a tonne from $8,793 the previous week.

Three-month aluminium slid to $2,241 a tonne from $2,381.

Three-month lead dropped to $2,046 a tonne from $2,404.

Three-month tin decreased to $19,700 a tonne from $23,450.

Three-month zinc retreated to $1,968 a tonne from $2,198.

Three-month nickel fell to $18,355 a tonne from $21,700.

COCOA: Prices hit two-year lows in London, at £1,745 a tonne.

By Friday on LIFFE, London's futures exchange, cocoa for delivery in December dropped to £1,760 a tonne from £1,813 the previous week.

In New York on the NYBOT-ICE, cocoa for December slid to $2,669 a tonne from $2,796.

SUGAR: Sugar prices, which have recently retreated on expectations that the 2011/12 season would see the first major surplus in three years, sharply accelerated losses.

"The macro picture has also caught up with the sugar market and it could be argued that the debt problem in Europe affecting bank capital and potential exposure, and the worsening economic prospects in the US are also a factor," said Sucden brokers analyst Nick Penney.

"All in all, a negative market in a negative economic backdrop. The fall has been swift as speculators and funds go into no risk mode."

By Friday on NYBOT-ICE, the price of unrefined sugar for delivery in March stood at 24.30 US cents a pound compared with 29.06 cents for the October contract a week earlier.

On LIFFE, the price of a tonne of white sugar for December plummeted to £623.30 from £708 the previous week.

COFFEE: Coffee prices fell further.

By Friday on NYBOT-ICE, Arabica for delivery in December dropped to 239 US cents a pound from 262 US cents the previous week.

On LIFFE, Robusta for November declined to $2,019 a tonne from $2,043 a tonne.

RUBBER: Rubber prices dropped as traders remained on the sidelines in anticipation of further losses ahead owing to a weak demand outlook.

The Malaysian Rubber Board's benchmark SMR20 slipped to 443.65 US cents a kilo from 462.75 US cents the previous week.


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