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Commodities Surge After Fed Bond Plan
By Javier Blas
Financial Times
Friday, March 20, 2009
Commodities prices surged on Thursday as investors sought protection against the risk of higher inflation by buying everything from oil and gold to copper and sugar.
Plans by the Federal Reserve to buy $300bn of US government debt triggered the stampede into commodities markets, which had suffered sharp price falls on worries that the world was heading for a depression. For the first time in almost a year, traders looked to oil and other raw materials as a hedge against an unexpected jump in prices.
The benchmark S&P GSCI index, a basket of raw materials, rose 6 per cent as oil prices soared to $51 a barrel, up 7 per cent on the day, to their highest level since December. Copper reached a four-month high.
The switch into commodities was triggered by concern that the US central bank might find it difficult to manage down the country's money supply when its economy turned. That could lead to sharply rising prices for many goods and services.
Hussein Allidina, head of commodities research at Morgan Stanley in New York, said: "Investors are buying commodities as protection against inflation and as a hedge against a weaker US dollar."
Nick Kalivas, an analyst at MF Global in New York, said that the aggressive move by the Fed was "stoking inflation expectations" and that there was a belief that a lot of money could flow into commodities.
The price rises gained extra momentum from a weakening dollar. The US currency extended its fall against the euro to 4.5 per cent over the past two days, hitting a low of $1.37 per euro.
Gold rose to $960 a troy ounce, up 8 per cent since the Fed's announcement on Wednesday.
Michael Lewis, commodity strategist at Deutsche Bank, said that commodities' markets had started to move away from the depression scenario that they were pricing in a few weeks ago. "The hope is that as radical central bank action spreads around the world, demand destruction fears will start to diminish," he said.
The International Monetary Fund forecast the world economy would contract 0.5-1 per cent this year, the first global fall in output in 60 years.
"Commodity prices are unlikely to recover while global activity is slowing," it said in a report ahead of the G20 summit of developed and developing nations next month in London.
US shares slipped as investors questioned how effective the Fed's move would be in averting a prolonged recession. In New York, the benchmark S&P 500 index was 1.3 per cent lower by the close.
SOURCE: http://www.ft.com/cms/s/0/e4c6fdd6-14b8-11de-8cd1-0000779fd2ac.html
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Commodities
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