January 28, 2008

Commodities fall amid economic worries

NEW YORK - While volatile stock markets have grabbed the spotlight this week, investors are wondering if fears of a U.S. recession could take the air out of the global boom in commodities prices.

U.S. commodities closed lower across the board Wednesday on lingering worries that a slowing U.S. economy will crimp demand. Agricultural futures plummeted. That followed a plunge in commodities other than gold on Tuesday, a day on which the Federal Reserve cut interest rates in the U.S. in an attempt to stave off an economic downturn.

As development booms throughout China and India, consumption of food, industrial metals and fuel has sent prices soaring. Rural populations are flooding into cities and incomes are rising, driving up the costs of feeding mouths and running cars. Infrastructure and housing construction continues to gobble up industrial metals as lights switch on across the continent.

Meanwhile, Americans struggle to stretch their paychecks at the gas pump and the grocery store as the dollar weakens and recession worries mount. Many economists have argued that demand from emerging markets will buoy commodities prices, regardless of slowdown in the U.S. This week's global stock market tremble, however, is putting that theory to the test.

"I'm not one of those people who believe the U.S. slowdown will not affect global demand," said Bart Melek, a global commodity strategist with BMO Capital Markets. "Much of the global growth and demand has come from the developing world, with China as the cornerstone."

Still, roads, power grids and other trappings of booming economies will prevent a serious drop-off in consumption, he said.

While weakened demand from Asia could weigh on prices for industrial metals such as copper and zinc, precious metals face less risk, said Carlos Sanchez, an analyst with CPM Group in New York. Gold is viewed as a financial asset and has spiked in value on demand from investors, rather than construction and fabrication consumers, he said.

"I wouldn't be surprised to see gold head up next week, possibly back above $900," on the metal's appeal as a hedge against economic uncertainty, Sanchez said.

Gold breached $900 an ounce for the first time ever on Jan. 11.

Other analysts, however, fretted that economic slowdown could temper demand for the metal, as nervous investors sell off assets.

"Many continue to ponder the reduced demand for all things precious and useful in the slowdown scenario that is being envisaged at the moment," Jon Nadler, senior analyst at Kitco Bullion Dealers, said in a research note.

An ounce of gold for February delivery fell $7.20 to settle at $883.10 Wednesday on the New York Mercantile Exchange.

Silver for March delivery slipped 13.5 cents to $15.97 an ounce on the Nymex, while March copper lost 12.45 cents to settle at $3.0720 a pound.

Crude futures dropped to their lowest closing price in three months on worries that oil inventories are rising even as the U.S. economy and demand for oil weaken.

Light, sweet crude for March delivery fell $2.22 to settle at $86.99 a barrel on the New York Mercantile Exchange.

The dollar rose against the euro. A higher dollar can make commodities less attractive as an alternative investment, and can also dampen demand from foreign buyers as their currencies weaken.

The 15-nation currency fell to $1.4610 in late afternoon trading.

Agricultural futures on the Chicago Board of Trade plummeted as risk of a U.S. recession triggered speculative selling.

Wheat for March delivery fell 29 cents to $9.05 a bushel and March corn lost 19.75 cents to $4.6925 a bushel. March oats shed 5.5 cents to $3.08 a bushel, while March soybeans plunged 50 cents to $11.895 a bushel.

In the long-term, however, the agricultural futures market appears somewhat safer from the economic fray. Depleted Chinese grain stocks and U.S. mandates for production of crops for biofuels have supported prices in recent months. And even when economies suffer, people still have to eat. "Food is always the very last thing people give up in a downturn," said Richard Feltes, senior vice president and director of commodities research for MF Global.

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