Commodities slowdown could last months, longer

Sunday August 10, 2008 MYT 9:15:09 AM

NEW YORK (AP): The commodities boom that just weeks ago looked unstoppable may have finally burned itself out.

Sudden plunges in the price of everything from crude to copper and cotton suggest commodities soared too high, too fast _ and analysts expect even steeper declines in the months ahead 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.''

At least some of the falling prices in commodities trading pits are likely to filter back down to consumers. Lower oil prices make it cheaper to ship food around the globe, and ease the burden on consumers when they fill their gas tanks and heat their homes. Falling prices for corn and soybeans should also have some impact on what shoppers pay in the supermarket.

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 U.S. was in a recession.

"There was a commodities bubble and it has burst,'' said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com.

The stark change in sentiment marks a stunning turnaround for the once-sizzling commodities sector, which 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.

In a sign of just how much the euphoria has faded, investors who thronged futures markets earlier this year seeking juicy, 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.''

Davide Accomazzo, managing director of trading at Los Angeles-based Cervino Capital Management, said his firm doesn't see good buying opportunities in commodities "for at least the next three to nine months.''

"The conditions just aren't right,'' said Accomazzo, whose firm trades options on metals, natural gas and soft commodities.

The downturn in commodities gained momentum after crude began tumbling last month, 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 ($1.05 a liter) gasoline forced many Americans to abandon fuel-guzzling SUVs and skip vacations.

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, Pennsylvania. "With poor demand prospects ahead ... there's not a lot of reason to be buying commodities right now.''

And here's another reason: Many commodities investors who got burned buying into the rally just before it turned likely won't have the stomach to get back in anytime soon, analysts say.

"I don't see them with their scorched fingers coming back into the market. That money is gone for a while,'' said Cordier, who said a "herd mentality'' pushed a wave of first-time commodities investors into the market, including some large fund managers who had never experience a boom in futures prices.

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.

Others say the same thing that sparked the boom will likely spur its revival: Burgeoning population growth and rising income levels in developing countries that will eventually add to pressure on world supplies of food, fuel and other goods.

Jon Nadler, a precious metals analyst with Kitco Bullion Dealers Montreal, said commodities could be seeing a pause now, "but the question is how intense is it and how long will it last?''

"People haven't stopped multiplying, so at some point you'd expected prices to go up again,'' he said.
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