Commodities Tumble in ‘Downward Spiral’

By Sharon Lindores - Sep 24, 2011 5:23 AM GMT+0700
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Traders work in the gold and silver options pit of the New York Mercantile Exchange. Photographer: Scott Eells/Bloomberg

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Sept. 23 (Bloomberg) -- Francisco Blanch, head of global commodities research at Bank of America Merrill Lynch, talks about oil prices and the outlook for commodity markets. He speaks with Erik Schatzker on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

Commodities fell to a nine-month low, led by routs in metals, on deepening concern that governments are running out of tools to avert a global recession, eroding prospects for raw-material demand.

European officials may accelerate the setup of a permanent rescue fund as the sovereign-debt crisis mounts. On Sept. 21, the Federal Reserve said the U.S. economy faces “significant downside risks.” In the next two days, gold plunged the most since 1983, and copper had the biggest slide in almost three years. Today, silver posted the largest drop in 32 years.

“We’re in a downward spiral, and no one knows when it’s going to end,” said Robin Bhar, an analyst at Credit Agricole SA in London. “There is a lot of uncertainty at this time as to how demand will develop.”

The Standard & Poor’s GSCI Index of 24 of energy, metal and agriculture prices fell 1.3 percent to settle at 599.25 at 3:47 p.m. New York. Earlier, the gauge touched 594.12, the lowest since Dec. 2. This week, the measure slumped 8.2 percent, the most in four months. The benchmark has tumbled 21 percent since touching a 32-month high in April.

The world economy will expand 4 percent this year and next, the International Monetary Fund said on Sept. 20, cutting forecasts made in June for a 4.3 percent expansion and 4.5 percent in 2012.

Economic ‘Fears’

“We are seeing commodity prices correcting, so they are more compatible with the global economy,” said Christin Tuxen, a senior analyst at Danske Bank A/S in Copenhagen. “When we have fears over the economic cycle as we have now and a higher probability of contraction, it hits industrial metals and commodities.”

Copper futures for December delivery declined 20.85 cents, or 6 percent, to $3.28 a pound on the Comex in New York. In two days, the price tumbled 13 percent, the most since October 2008.

Yesterday, a preliminary index of purchasing managers in China, the world’s top consumer of industrial metals, indicated that manufacturing contracted.

“We are not predicting a recession in the Western world, but low growth for the long term,” Tuxen said. “We are looking for a rebound in China and Asia in the fourth quarter and in 2012, which will help copper and aluminum.”

Gold futures for December delivery fell $101.90, or 5.9 percent, to $1,639.80 an ounce on the Comex, the biggest decline since March 2008. In two days, the metal dropped 9.3 percent, the most since February 1983.

Fed Twist

This week, the Fed said it will increase holdings of longer-maturity Treasuries in a bid to bolster the economy, shifting from debt maturing in three years of less.

“Gold has to roll with the masses, as markets show their disappointment in the Fed’s ‘Operation Twist’,” Edel Tully, a London-based analyst at UBS AG, said in a report.

The metal has dropped 15 percent since reaching a record $1,923.70 on Sept. 6.

“Gold has become the source of liquidity for global-margin calls,” said Michael A. Gayed, the chief investment strategist at Pension Partners LLC. “Also, deflationary pressures are acting on gold.”

Silver futures for December delivery fell $6.477, or 18 percent, to $30.101 an ounce on the Comex, the biggest drop since October 1979.

“We’re in a ‘risk-off’ mentality,” Bill O’Neill, a co- founder of Logic Advisors in Upper Saddle River, New Jersey, said in a telephone interview. “Some of it certainly is a case of sell the winning assets to meet the margin calls for the losing assets. We’re seeing massive selling across the spectrum in commodities.”

Today, CME Group Inc., the Comex owner, raised margins to trade gold, silver and copper futures.

Crude oil and corn had the biggest weekly drops since May. Coffee prices have tumbled 20 percent this month, and cocoa is down to a one-year low.

To contact the reporter on this story: Sharon Lindores in London at slindores@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net.