During the first six months of last year, commodities looked to be the saviour of investors who were losing money in the stock market. In the second half, particularly for those who had invested in oil, futures contracts were their undoing. So what is it going to be like this year?
At the start of 2009, commodities have little appeal. Most analysts expect prices to remain under pressure as worldwide demand continues to wane for basic materials.
“For commodities to do well, they need demand and they need present demand,” said Matt Zeman, head trader at LaSalle Futures. “Until we see the physical demand picking up, we’re going to have a hard time.”
Still, analysts expect the futures markets to escape the sharp price swings they saw last year. Prices might not move much higher, but analysts predict the market will be more stable, which means what consumers pay for staples like gas and food will not increase much either.
Commodities soared in 2008 - including oil reaching a once-unthinkable US$147.27 a barrel in July and gold shooting up to a record US$1,033.90 an ounce in March - on a wave of unprecedented global growth, especially the booming economies in China and India. Meanwhile, the dollar fell considerably against other major currencies, making commodities all the more attractive as a hedge against the weaker greenback.
The volatility on Wall Street during the first half of the year also raised the profile of commodities, as hedge funds and other big investors poured into the futures markets hoping for some big returns. But a large part of the buying, especially in the oil markets, was fed by speculators who believed demand would only soar.
“People bought oil and commodities because they thought the rest of the world would continue to consume,” said Phil Flynn, senior energy analyst with Alaron Trading. “They were wrong. And they were wrong in a spectacular fashion.”
Prices began to skid as it became clear the US economy was weakening rapidly - a trend exacerbated by the paralysis in the credit markets after the collapse of Lehman Brothers in September. Crude’s plunge was the most dramatic, with a barrel dropping to US$35 in late December, but the chaos in the market was evident in other commodities as well.
After setting its record on March 17, gold dropped more than US$300 an ounce to just under US$705 in mid-November. The metal’s path was a broken one, as investors were alternately attracted by its reputation for holding its value and turned away by commodities’ tarnished image. At year’s end, it was trading at US$875.
Wheat topped US$12.70 a bushel in March, lifted in part by bad weather in several growing areas, but also on the belief that demand would increase in a wealthier global economy. By the end of the year, it was trading in the US$5 range.
Copper rode expectations of rising demand in China to a record of US$4.22 a pound in early July. At year’s end, battered by the recession, it was trading under US$1.30.
The Reuters/Jefferies CRB Index of 19 raw materials fell 36 per cent in 2008, the most since the gauge made its debut in 1956, to 229.54. Only four materials, paced by cocoa, climbed in the year.
At first, the drop in commodities was seen as beneficial for economies; with prices cheaper, demand, it was thought, might come back. But as the decline continued, the lower prices were worrisome, as indicators of just how weak the global economy was.
There are a number of variables that make it hard for analysts to predict much about the commodities market in 2009.
One is, what will happen to interest rates in other countries and, in turn, the US dollar. The Federal Reserve has sent US rates about as low as they can go, cutting the benchmark federal funds rate to a range of zero to 0.25 per cent. Lower interest rates can spur economic activity as cheaper borrowing costs give consumers more money in their pockets to spend. But lower rates can weigh on currencies as investors seek higher returns elsewhere.
It is not known whether central banks across Europe and Asia will also slash interest rates, further undermining their own currencies and potentially giving the greenback a boost. If their rates are stable, the dollar could weaken, and commodities might get a lift.
“The question is, what is going to happen to the dollar?” said Rob Kurzatkowski, a futures analyst with OptionsXpress. “Everybody is kind of left scratching their head.”
There’s also uncertainty about inflation, which can rise in an environment of low borrowing costs. That could benefit commodities.
“If we keep interest rates low for some time, that is going to mean inflation comes back with a vengeance,” Mr. Zeman said.
Gold is perhaps the biggest beneficiary in times of inflation and stock market volatility; the belief is that gold has more potential to advance than other investments.
Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal, expects gold prices to trade within a range of US$630 to US$980 an ounce this year, with average prices hovering around US$810.
One factor that stands in the way of another commodities boom in the new year is that investors, having been so badly burned by the plunge last year, are unlikely to flood back into the market. The billions of dollars lost as speculative buyers fled the market have left many investors chastened. But that will mean markets that are more orderly, perhaps even more sensible, should help consumers and the overall economy.
“Less volatility presents less price risk, which in turn should translate into lower costs to the consumer,” said Stephen Platt, futures strategist with Archer Financial Services.
“Things are going to be a lot better this year than a lot of people think,” Lars Steffensen, founder and managing director of commodity hedge fund Ebullio Capital Management told Bloomberg.
“The US is going to print the dollar to get out of the recession, and anything tangible, like industrial metals, is going to be worth more.”
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Dollar the X-Factor in Commodity Markets
Investors may buy gold but little else
Sara Lepro, SP
4 January 2009
During the first six months of last year, commodities looked to be the saviour of investors who were losing money in the stock market. In the second half, particularly for those who had invested in oil, futures contracts were their undoing. So what is it going to be like this year?
At the start of 2009, commodities have little appeal. Most analysts expect prices to remain under pressure as worldwide demand continues to wane for basic materials.
“For commodities to do well, they need demand and they need present demand,” said Matt Zeman, head trader at LaSalle Futures. “Until we see the physical demand picking up, we’re going to have a hard time.”
Still, analysts expect the futures markets to escape the sharp price swings they saw last year. Prices might not move much higher, but analysts predict the market will be more stable, which means what consumers pay for staples like gas and food will not increase much either.
Commodities soared in 2008 - including oil reaching a once-unthinkable US$147.27 a barrel in July and gold shooting up to a record US$1,033.90 an ounce in March - on a wave of unprecedented global growth, especially the booming economies in China and India. Meanwhile, the dollar fell considerably against other major currencies, making commodities all the more attractive as a hedge against the weaker greenback.
The volatility on Wall Street during the first half of the year also raised the profile of commodities, as hedge funds and other big investors poured into the futures markets hoping for some big returns. But a large part of the buying, especially in the oil markets, was fed by speculators who believed demand would only soar.
“People bought oil and commodities because they thought the rest of the world would continue to consume,” said Phil Flynn, senior energy analyst with Alaron Trading. “They were wrong. And they were wrong in a spectacular fashion.”
Prices began to skid as it became clear the US economy was weakening rapidly - a trend exacerbated by the paralysis in the credit markets after the collapse of Lehman Brothers in September. Crude’s plunge was the most dramatic, with a barrel dropping to US$35 in late December, but the chaos in the market was evident in other commodities as well.
After setting its record on March 17, gold dropped more than US$300 an ounce to just under US$705 in mid-November. The metal’s path was a broken one, as investors were alternately attracted by its reputation for holding its value and turned away by commodities’ tarnished image. At year’s end, it was trading at US$875.
Wheat topped US$12.70 a bushel in March, lifted in part by bad weather in several growing areas, but also on the belief that demand would increase in a wealthier global economy. By the end of the year, it was trading in the US$5 range.
Copper rode expectations of rising demand in China to a record of US$4.22 a pound in early July. At year’s end, battered by the recession, it was trading under US$1.30.
The Reuters/Jefferies CRB Index of 19 raw materials fell 36 per cent in 2008, the most since the gauge made its debut in 1956, to 229.54. Only four materials, paced by cocoa, climbed in the year.
At first, the drop in commodities was seen as beneficial for economies; with prices cheaper, demand, it was thought, might come back. But as the decline continued, the lower prices were worrisome, as indicators of just how weak the global economy was.
There are a number of variables that make it hard for analysts to predict much about the commodities market in 2009.
One is, what will happen to interest rates in other countries and, in turn, the US dollar. The Federal Reserve has sent US rates about as low as they can go, cutting the benchmark federal funds rate to a range of zero to 0.25 per cent. Lower interest rates can spur economic activity as cheaper borrowing costs give consumers more money in their pockets to spend. But lower rates can weigh on currencies as investors seek higher returns elsewhere.
It is not known whether central banks across Europe and Asia will also slash interest rates, further undermining their own currencies and potentially giving the greenback a boost. If their rates are stable, the dollar could weaken, and commodities might get a lift.
“The question is, what is going to happen to the dollar?” said Rob Kurzatkowski, a futures analyst with OptionsXpress. “Everybody is kind of left scratching their head.”
There’s also uncertainty about inflation, which can rise in an environment of low borrowing costs. That could benefit commodities.
“If we keep interest rates low for some time, that is going to mean inflation comes back with a vengeance,” Mr. Zeman said.
Gold is perhaps the biggest beneficiary in times of inflation and stock market volatility; the belief is that gold has more potential to advance than other investments.
Jon Nadler, senior analyst at Kitco Bullion Dealers Montreal, expects gold prices to trade within a range of US$630 to US$980 an ounce this year, with average prices hovering around US$810.
One factor that stands in the way of another commodities boom in the new year is that investors, having been so badly burned by the plunge last year, are unlikely to flood back into the market. The billions of dollars lost as speculative buyers fled the market have left many investors chastened. But that will mean markets that are more orderly, perhaps even more sensible, should help consumers and the overall economy.
“Less volatility presents less price risk, which in turn should translate into lower costs to the consumer,” said Stephen Platt, futures strategist with Archer Financial Services.
“Things are going to be a lot better this year than a lot of people think,” Lars Steffensen, founder and managing director of commodity hedge fund Ebullio Capital Management told Bloomberg.
“The US is going to print the dollar to get out of the recession, and anything tangible, like industrial metals, is going to be worth more.”
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