Commodities plunge as money flees after 8-month surge; oil nears $100 a barrel

May 5, 2011 11:23 AM PT

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Commodity markets are in a blistering retreat Thursday, as fresh worries about global economic growth give many investors and traders the perfect excuse to take profits after the huge price gains of the last eight months.

A rebounding dollar also is undercutting the raw-materials markets.

The ThomsonReuters/Jefferies CRB index of 19 major commodities was down 16.88 points, or 4.7%, to 341.75 at about 11:15 a.m. PDT, the biggest drop this year and the fourth straight decline.

The index (charted at left) now has fallen 7.8% from its two-year high reached April 29.

Crude oil was one of the day’s biggest losers, with near-term futures in New York falling $8.88, or 8.1%, to $100.36 a barrel, the lowest price since March 16. [Updated at 2 p.m. PDT: Crude ended the day at $99.80, down $9.44.]

Eighteen of the 19 raw materials in the CRB index were down for the day. Only hog futures were trading higher.

Traders said one trigger for the sell-off was the government’s report that first-time claims for unemployment benefits surged 43,000 to 474,000 last week, the highest level in eight months and the second straight increase.

Although special factors exaggerated the jump in claims (temporary auto-plant shutdowns, for instance), “Even with these distortions accounted for, the result was still poor, and suggests some slowing of employment growth,” economists at Goldman Sachs said in a note. On Friday the government will report on April job growth.

Other data in recent days also have raised doubts about the pace of the economic recovery. A report Wednesday on the U.S. services sector showed a sharp slowdown in activity in April.

Prices of most commodities have rocketed since August, in part on expectations that an improving economy would boost demand for materials. And because most commodities are priced in dollars, the greenback’s slide since August against other currencies has made materials cheaper for foreign investors to buy.

What’s more, U.S. investors have been drawn to commodities, including gold and silver, as a way to hedge against the dollar’s loss of purchasing power.

But the dollar was playing the role of spoiler on Thursday, staging its biggest rebound of the year. The euro, which has been streaking higher against the buck, slid 1.8% to $1.456 from $1.483 after the European Central Bank held short-term interest rates steady. Rising interest rates overseas, while U.S. short-term rates remain near zero, have been one of the biggest depressants on the dollar.

“A correction [in the dollar’s slide] was long overdue, and it was only a matter of time before an event triggered it,” said Michael Woolfolk, currency strategist at Bank of New York Mellon.

Likewise, the heady gains in many commodities this year have spurred warnings that the market was primed for at least a short-term reversal. Plus, higher prices can sow the seeds of their own demise by curbing consumption.

Now, ‘People feel the need to book profits and get on the side for a while,’ said Frank Cholly, a commodities strategist at Lind-Waldock & Co. in Chicago.

The year’s hottest commodity, silver, was the first to crumble: After reaching a 31-year high of $48.58 an ounce on Friday, the metal fell $2.51, or 5.2%, on Monday, then 7.6% on Tuesday and 7.5% on Wednesday.

On Thursday silver was down another 8%, or $3.15, to $36.23 an ounce. Gold, which hit a nominal record high of $1,556.70 an ounce on Monday, tumbled $34, or 2.2%, to $1,480.90.

The Comex market in New York, where silver futures trade, has been actively trying to damp volatility in the metal by repeatedly raising margin requirements over the last two weeks. Margin is the minimum cash deposit investors must put up or maintain to trade the contracts.

Why everything had been going up, except the dollar

-- Tom Petruno