Commodities go ka-ching; buyers go, 'Ouch'

Cold steel is red-hot. So is lead. And wheat. Commodities are the hottest investment on the planet today.

Investment banks are scrambling to hire commodity traders and analysts, even as they lay off thousands of existing employees. Oil prices approached the once-unthinkable level of $100 a barrel last month before falling back Friday to $88.71. Grain and oilseeds trading on Chicago futures exchanges are up more than 25% from 2006. Copper prices soared so high that the U.S. Mint had to ban people from melting pennies and nickels to resell the metal.

For farmers, mining companies and commodities brokers, the boom in oil, metals and agricultural products is a boon. But for consumers, who are paying sharply higher prices for food and energy, the bull market in commodities means spending less on other things, from vacations to restaurants and entertainment.

And for the Federal Reserve, soaring commodity prices mean struggling to meet two conflicting goals: fighting inflation even while pumping money into the nation's banking system to prevent a broad economic slowdown as housing and credit markets teeter.

Overall, commodity prices are showing the largest sustained gains since the late 1970s and early 1980s. The Reuters rtrsy CRB index, which measures the price of a basket of basic foodstuffs, metals and fuels, has soared 18% in the past 12 months, and 121% since Dec. 31, 1999.

Oil prices are the most important and visible sign of the trend: The price of a barrel of West Texas light, sweet crude is now $88.71, vs. $61 at the start of this year and $11.37 in February 1999. But the International Monetary Fund (IMF) notes precious metals such as gold, industrial metals such as lead and nickel, and foodstuffs, including wheat and edible oils, all hit record highs in 2007.

Even lesser-known commodities such as potash, a potassium-rich material used to promote root development in plants, are skyrocketing. As global food and biofuel needs accelerate, demand is outstripping supply. The Potash Corp. of Saskatchewan has gradually raised prices by 60% from last January.

"We've had most of our customers on an allocation basis for the better part of the year. We can't fulfill their orders. We're getting them what we can get them right now," says Rhonda Speiss of Potash.

Commodity prices are jumping for a host of reasons. Two in particular: India and China, whose economies are racing. China's output gained at an 11.5% annual pace in the third quarter, vs. 4.9% for the USA. India's GDP soared 9.3%.

Such enormous growth requires raw materials, and lots of them. China, for example, produced 3.6 million barrels of oil a day in 2005 but consumed 6.5 million.

And it's not just China and India, says author and hedge fund manager Jim Rogers. When commodities boomed in the 1970s, China, India and much of Asia were subsistence economies. No longer: Much of Asia and the Third World in general are seeing dramatically higher standards of living. "They're all in the game now," Rogers says.

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