Commodities plunge: good news for consumers
Commodities like oil, gold, and copper all fell this week. Silver led the plunge in commodities with a 28 percent decline.
Investors finally hit the brakes on oil, gold, silver and food prices. This week's sharp sell-off doesn't mean commodity prices' stunning rise over the last several months is over, but it is good news for anyone planning a road trip this summer.Skip to next paragraph
Subscribe Today to the Monitor
Oil prices fell 15 percent this week, the steepest decline in two and a half years, just as average U.S. pump prices were approaching $4 a gallon. Gasoline prices fell imperceptibly to consumers' eyes Friday — one-tenth of a penny to just over $3.98 per gallon — but that ended a 44-day streak of rising prices. Prices will soon drop noticeably and some analysts said they could hit $3.50 by summer.
Analysts say investors got nervous that oil, metals and grains had risen over the past few months to unrealistic heights. Their rush to sell also knocked silver prices down 28 percent, sugar down 13 percent and natural gas down 10 percent.
The most common reason given by analysts for the sell-off was the strengthening U.S. dollar.
Commodities such as oil and silver are bought and sold in dollars. When the dollar is weak, those commodities are cheaper for holders of foreign currency. Those investors sell when the dollar rises and commodities look more expensive to them.
An index of the dollar compared with a basket of foreign currencies rose 2 percent for the week. But many investors who sold commodities this week may simply have been waiting for a sign, any sign, to get out of overheated markets.
"You had the sense that the price had gone up too far, too fast," said Michael Lynch, President of Strategic Energy and Economic Research. "People were leaning against the door and waiting for a signal."
Commodity prices began to rise in late August. That's when the Federal Reserve signaled its intention to embark on what became a $600 billion government bond-buying program designed to push down interest rates, boost stock prices and jolt the economy.
But the dollar fell as a result. Investors knew the Fed would be flooding financial markets with U.S. currency. Many of those dollars poured into commodities, pushing them ever higher.
Still, traders say this week's sell-off is very likely just a pause in a long-term upward trend for commodities. While prices could fall in the near-term, a stronger U.S. economy and rapidly growing economies of Asia will continue to need food, energy and raw materials.
"This move wasn't about supply issues," said Rich Ilczyszyn, Senior Market Strategist at Lind-Waldcock, a Chicago futures brokerage firm. "It was people hedging and people investing."
On Friday, some commodities rose after a U.S. Labor Department report showed surprisingly robust job growth in April. Also, some investors saw commodities as a bargain after the big declines.
Many of those investors are not producers, distributors or sellers but speculators, a term
regulators use to refer to investors just betting on prices with no desire to possess the often big and bulkycommodity. Speculators buy commodity futures, or bets on prices several months hence.
Investing in futures has exploded. Commodity index funds have an estimated $300 billion riding on futures, up from $13 billion seven years ago, according to Mike Masters, a hedge fund manager who has argued for regulations limiting speculation.
This has raised concerns that consumers are paying higher prices than they should for energy and food. President Obama recently convened a task force to investigate manipulation of oil and gas markets.
The task force's chairman, Attorney General Eric Holder, wrote a memo Friday to several government agencies addressing the commodity sell-off. "If wholesale prices continue to decrease, fraud or manipulation must not be allowed to prevent price decreases from being passed on to consumers," he wrote.
The commodity sell-off began with silver, a notoriously volatile precious metal that had risen dramatically in recent weeks.
On Tuesday, CME Group, the largest futures exchange in the U.S., forced traders for the third time in a week to increase the amount of cash they must set aside to guarantee their trades in an effort to tamp down volatility.
This made it more expensive to trade in silver, dissuading speculators.
Meanwhile, reports surfaced that prominent hedge funds that had been accumulating silver and other precious metals for months began to sell. Silver tumbled 28 percent over the week.
Gold, often used by investors to protect against a weakening dollar, fell 4 percent.