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Gold Prices Fall: Commodities drop ahead?

Posted March 20, 2008

Blogger’s Note: I’ve argued in the past that gold and commodities over the last couple of years have become so equitized that they might as well be counter-cyclical stocks. Or maybe not even counter-cyclical. Because over the past years, the global economic recovery has been fueled by U.S. consumer spending. The more Americans spent, the more the EU and China were able to sell, the more resources and commodities they consumed… the higher prices went. And the higher commodities prices went, the more hedge and pension funds bought commodities, sidelining supplies.

How will it shake out if America turns down the spending faucet due to credit crunch and recession? My guess is that demand for commodities will start to give… It may even give so much that hedge funds have to liquidate their stashes, flooding the markets with assets. It may not happen tomorrow. But every bubble bursts at some point…. For the current development, this Bloomberg article provides some excellent background.

By Pham-Duy Nguyen and Millie Munshi

Baltimore — (TFN): Gold plunged the most since June 2006, leading a decline in commodity prices, on speculation the slump in the dollar will end as the Federal Reserve eases the pace of interest-rate reductions.

The UBS Bloomberg Constant Maturity Commodity Index fell 61.3866, or 4.1 percent, to 1,428.009 at 5 p.m. in New York, led by declines in soybeans, wheat, cocoa and crude oil. The index of 26 commodities has dropped in three of the past four sessions and is down 9.3 percent from a record on Feb. 29.

The Fed yesterday cut the overnight-lending rate 75 basis points to 2.25 percent, the sixth reduction since September, in a bid to avert a U.S. recession. Analysts had forecast a bigger cut to 2 percent, an expectation that helped spur commodities to record highs as investors sought a hedge against inflation by stocking up on raw materials. Read on…

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