Investors shift gears as the scenery changes
NEW YORK - The commodities boom that just weeks ago looked unstoppable may have finally burned itself out. Sudden plunges in the price not only of crude oil, but also of copper, cotton, precious metals, cocoa and other commodities suggest they soared too high, too fast - and analysts expect even steeper declines as the U.S. economic slowdown spreads overseas and saps demand for energy, construction supplies and consumer goods.
NEW YORK - The commodities boom that just weeks ago looked unstoppable may have finally burned itself out.
Sudden plunges in the price not only of crude oil, but also of copper, cotton, precious metals, cocoa and other commodities suggest they soared too high, too fast - and analysts expect even steeper declines as the U.S. economic slowdown spreads overseas and saps demand for energy, construction supplies and consumer goods.
Though commodities could swing higher again if the U.S. economy bounces back or world oil supplies suddenly become scarce, experts consider neither scenario appears likely for several months or longer.
"The downward pace still has a way to go," said Edward Meir, senior commodities analyst at MF Global in New York. "People are now coming around to the fact that growth is slowing, both in the U.S. and overseas, so demand for commodities will decline."
Highlighting the spiral, the Jefferies-Reuters CRB index, a global commodities benchmark, plunged 10 percent in July, its biggest monthly drop since 1980, when the United States was in a recession.
"There was a commodities bubble and it has burst," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.
The change marks a stunning turnaround. The commodities sector only months ago seemed on a relentless march higher amid a global scramble for natural resources and a weak dollar that made them cheaper to overseas buyers. No longer.
Investors who thronged futures markets earlier this year seeking double-digit returns now can't sell gold, silver and cocoa futures fast enough. Gold, for example, is now selling for $864 an ounce - down from a record of $1,038.60 an ounce on March 17 - and lately has been falling $10 or more a day.
"Everybody is scrambling to get out of the ship before the guy next to them," said Nathan Golz, a commodities researcher at Wachovia Securities in St. Louis.
"It's amazing how fast commodities have become the last place people want to have their money."
The downturn in commodities gained momentum after crude began tumbling in July, dragging down precious metals, grains and other commodities as traders raced to dump positions. Oil has lost about $32, or 21 percent, from its record high of $147.27 a barrel hit last month, as $4-a-gallon gasoline forced many Americans to abandon fuel-guzzling SUVs and skip vacations. Oil futures closed in New York yesterday at $115.20, down $4.82.
As the busy U.S. driving season enters its last month, oil market speculators have shifted their investment strategy and are now shorting crude - or betting prices will fall - for the first time in 17 months.
"It looks like the bulls have run out of ammo," said Stephen Schork, analyst and oil trader in Villanova, Pa. "With poor demand prospects ahead ... there's not a lot of reason to be buying commodities right now."
So what could bring commodities back up?
Analysts say the biggest factor is the ailing U.S. economy. If growth picks up, unemployment falls, and consumers start spending again, demand for energy, building materials and other goods will increase, straining world supplies again.
"But we're not expecting that to happen for at least a few quarters," said Cordier.
China could also be a catalyst. The country has restricted driving and closed factories to reduce pollution during this month's Beijing Olympics, and some people expect a bump in demand for gasoline, coal and other material once the Games finish.