Commodity Prices Plunge, End Week With Biggest Drop Since 1956

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.

We started to see a speculative frenzy in commodities, said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors Inc. in San Antonio. Growth is going to be quite muted, and that does not bode well for commodities.

Slowing global growth signals commodity demand will soften, the International Monetary Fund said this week.

The weighted UBS Bloomberg Constant Maturity Commodity Index of 26 raw materials had gained 20 percent this year before the week began, reaching a record on Feb. 29. The gauge climbed in each of the past six years, more than tripling in value.

The rally may be coming to an end as the U.S., the world's largest economy, slips into a recession, damping global expansion, said Leonard Kaplan, president of Prospector Asset Management in Evanston, Illinois.

Commodities were a bubble that is now bursting, Kaplan said. Prices will go lower than you can believe.

The CRB index fell 6.56, or 1.7 percent, to 381.74 in New York. On March 17, the gauge plunged 4.6 percent, the most in five decades. It dropped 4.1 percent yesterday.

`Recession Fears'

Global-recession fears are causing selling pressure in all commodities, said James Mound, head analyst for MoundReport.com, a commodities newsletter, in Palm Coast, Florida. The markets are focusing on want-based items instead of need-based items.

Investor demand for commodities led to a buying orgy, Paul Touradji, founder of the $3.5 billion hedge fund Touradji Capital Management, told clients on March 10. Commodities have all gone parabolically higher on frenzied money flow, he said.

A slumping dollar and less-attractive returns on equities and bonds boosted the appeal of commodities as a hedge against inflation and an alternative investment, said Michael K. Smith, president of T&K Futures & Options in Port St. Lucie, Florida. Investors are now selling raw-material futures to raise cash, he said, citing demands for investors to put up more collateral.

Margin Calls

There's a lack of liquidity to cover margin calls, Smith said. There's a panic in the market that's taken hold very quickly. We could see commodity prices continue to tumble.

Gold futures for April delivery fell $25.30, or 2.7 percent, to $920 an ounce on the Comex division of the New York Mercantile Exchange. The price reached a record $1,033.90 an ounce on March 17. The precious metal plunged $59 yesterday.

The dollar has rebounded this week from a record against the euro and a 12-year low against the yen.

Crude-oil futures for May delivery fell 70 cents, or 0.7 percent, to $101.84 a barrel on the Nymex. The price soared to a record $111.80 a barrel on March 17.

Oil probably will fall toward $90 a barrel this spring as the slowing U.S. economy encourages traders to exit commodity markets, Goldman Sachs Group Inc. analysts including Jeffrey Currie said in a report today.

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.

Cocoa plunged more than 9 percent today, and wheat tumbled 8.1 percent. Soybeans and corn dropped almost 4 percent. Among the 26 commodities in the UBS Bloomberg index, only cattle and hogs gained this week.

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, James Proudlock, commodity product head for Europe, Middle East and Asia at JPMorgan Securities Ltd., said at a sugar conference yesterday in Geneva.

The money flowing into commodities was absolutely enormous, Proudlock said.