Prospect of slower growth slams commodity prices

ByABC News
March 21, 2008, 12:08 AM

— -- Commodity prices plunged Thursday, capping the biggest weekly drop in five decades, on speculation that slower global economic growth will curb demand for energy, metals and grains.

The Reuters/Jefferies CRB index of 19 commodities tumbled 8.3% this week, marking the steepest drop since at least 1956. After reaching records earlier in the week, gold plummeted as much as $129 an ounce, and crude oil tumbled more than $13 a barrel.

"We started to see a speculative frenzy in commodities," said Brian Hicks, who helps manage $1.5 billion at U.S. Global Investors in San Antonio. "Growth is going to be quite muted, and that does not bode well for commodities."

Slowing global growth signals commodity demand will "soften," the International Monetary Fund predicted this week.

Gold futures for April delivery fell $25.10, or 2.7%, to $919.60 an ounce on the New York Mercantile Exchange. Gold traded at a record $1,033.90 an ounce on Monday. The precious metal plunged $58.50 Wednesday.

Crude oil futures for May delivery fell $2.64, or 2.5%, to $101.84 a barrel on the Nymex. The price had soared to a record $111.80 a barrel on Monday. Oil probably will fall toward $90 a barrel this spring as the slowing U.S. economy encourages traders to exit commodity markets, Goldman Sachs analysts, including Jeffrey Currie, said in a report Thursday.

"The oil price slump, along with all the other commodities, resulted from the dollar staging a rally, so the large funds flowed out of the commodities complex," said Victor Shum, senior principal at consultants Purvin & Gertz in Singapore. "Investors have found a trigger to focus more on fundamentals."

Cocoa plunged more than 9% Thursday, and wheat tumbled 8.1%. Soybeans and corn dropped almost 4%. Among the 26 commodities in the UBS Bloomberg Constant Maturity Commodity index, only cattle and hogs gained this week. The index had gained 20% this year, before the week began.

The commodity rally may be coming to an end as the USA, the world's largest economy, slips into a recession, damping global expansion, said Leonard Kaplan, president of Prospector Asset Management in Evanston, Ill. "Commodities were a bubble" that is now bursting, Kaplan said. "Prices will go lower than you can believe."