Metals hard to judge in 2009
the first six months of 2008, commodities looked
to be the saviour of investors who were losing
money in the stock market. In the second half,
particularly for those who had invested in oil,
futures contracts were their undoing.
At the start of 2009, commodities have little
appeal. Most analysts expect prices to remain
under pressure as worldwide demand continues to
wane for basic materials of all kinds.
"For commodities to do well, they need demand
and they need present demand," said Matt Zeman,
head trader at LaSalle Futures in Chicago.
"Until we see the physical demand picking up,
we're going to have a hard time moving forward."
Still, analysts expect the futures markets to
escape the sharp price swings they saw in 2008.
Prices might not move much higher, but analysts
predict the market will be more stable, which
means what consumers pay for staples like gas
and food won't increase much either.
Commodities soared in 2008 - including oil
reaching a once-unthinkable $147.27 a barrel in
July and gold shooting up to a record $1 033.90
an ounce in March - on a wave of unprecedented
global growth, especially the booming economies
in China and India. Meanwhile, the dollar fell
considerably against other major currencies,
making commodities all the more attractive as a
hedge against the weaker greenback.
The volatility on Wall Street during the first
half of the year also raised commodities'
profile, as hedge funds and other big investors
poured into the futures markets hoping to grab
hold of some big returns. But a large part of
the buying, especially in the oil markets, was
fed by speculators who believed demand would
"People bought oil and commodities because they
thought the rest of the world would continue to
consume," said Phil Flynn, senior energy analyst
with Alaron Trading. "They were wrong. And they
were wrong in a spectacular fashion."
Prices began to skid as it became clear the US
economy was weakening rapidly - a trend
exacerbated by the paralysis in the credit
markets after the collapse of Lehman Brothers
Holdings in September. Crude's plunge was the
most dramatic, with a barrel dropping to $35 in
late December, but the chaos in the market was
evident in other commodities:
* After setting its record March 17, gold
dropped more than $300 an ounce to just under
$705 in mid-November. The metal's path was a
broken one, as investors were alternately
attracted by its reputation for holding its
value and turned away by commodities' tarnished
image. At year's end, it was trading at about
* Wheat topped $12.70 a bushel in March, lifted
in part by bad weather in several growing areas,
but also on the belief that demand would
increase in a wealthier global economy. By the
end of the year, wheat was trading in the $5
* Copper rode expectations of rising demand in
China to a record of $4.22 a pound in early
July. At year's end, battered by the recession,
it was trading under $1.30.
At first, the drop in commodities was seen as
beneficial for economies; with prices cheaper,
demand might come back. But as the huge decline
continued, the lower prices were worrisome in
and of themselves as indicators of just how weak
the global economy is.
Predicting 2009 a tricky business
There are a number of variables that make it
hard for analysts to predict much about the
commodities market in 2009.
One is what will happen to interest rates in
other countries, and in turn, the dollar.
The Federal Reserve has sent US rates about as
low as they can go, earlier this month cutting
the benchmark federal funds rate to a range of
zero to 0.25%. Lower interest rates can spur
economic activity, as cheaper borrowing costs
give consumers more money in their pockets to
spend. But lower rates can weigh on currencies
as investors seek higher returns elsewhere.
It's not known whether central banks across
Europe and Asia will also slash interest rates,
further undermining their own currencies, and
potentially giving the greenback a boost. If
their rates are stable, the dollar could weaken,
and commodities might get a lift.
"The question is, what is going to happen to the
dollar?" said Rob Kurzatkowski, a futures
analyst with OptionsXpress. "Everybody is kind
of left scratching their head."
There's also uncertainty about inflation, which
can rise in an environment of low borrowing
costs. That could benefit commodities.
"If we keep interest rates low for some time,
that is going to mean inflation comes back with
vengeance," Zeman said.
Gold has potential
Gold is perhaps the biggest beneficiary in times
of inflation and stock market volatility; the
belief is that gold has more potential to
advance than other investments. Jon Nadler,
senior analyst at Kitco Bullion Dealers
Montreal, expects gold prices to trade within a
range of $630 to $980 an ounce next year, with
average prices hovering around $810.
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newsletterOne factor that stands in the way of
another commodities boom in the new year is that
investors, having been so badly burned by the
plunge in prices during 2008, are unlikely to
flood back into the market.
It's true that signs of an improving global
economy should give the futures markets back
some of their strength, but the billions of
dollars lost as speculative buyers fled the
market have left many investors chastened.
But that will mean markets that are more
orderly, perhaps even more sensible, which
should help consumers and the overall economy.
"Less volatility presents less price risk, which
in turn should translate into lower costs to the
consumer," said Stephen Platt, futures
strategist with Archer Financial Services.
US consumers have already seen how plunging oil
prices have affected what they pay at the pump.
Gasoline prices followed crude into the
stratosphere, bolting to an average of $4.11 a
gallon ($1.08 a litre) in July, according to
AAA, the Oil Price Information Service and
Wright Express. That's down from $2.972 a year
ago. At year's end, the price had fallen to
$1.62 (42 cents a litre).
Food prices are likely to take longer to come
down. While the prices for wheat, corn and other
grains have declined, and the gasoline used to
transport food is cheaper, meat prices are
likely to remain high because farmers have
thinned out their herds. And, processed food
like cereal has many more factors than
ingredients that determine how much they cost -
labour, packaging and marketing all figure into