TSX also drops as concern over global recession fuels fear that commodity prices have hit their peak


00:00 EDT Saturday, August 16, 2008

The price of gold, which just five months ago broke through a record $1,000 (U.S.) an ounce, plunged back below $800 as bullion suffered its largest weekly decline in a quarter century.
Commodities including gold, oil and silver all fell sharply yesterday, adding to a month-long selloff driven by the sudden rise in the U.S. dollar and fresh evidence of a possible global recession.
The drubbing saw the resource-heavy S&P TSX composite index skid 262 points or 2 per cent on fears that the commodity boom, which for years has been the prime driver of Canada's economic strength, could be on the precipice of collapse.
Declining economic growth in Europe and Japan coupled with the once moribund greenback's stunning revival could foretell the end of the resource sector's glory days.
European central bankers, which have been raising interest rates to fight off inflation, are likely finished tightening. The European Commission said this week that the economy in the 15 countries that use the euro receded during the three months ended in June - the first economic pullback for the region since adoption of the euro almost a decade ago.
The prospect of lower lending rates in Europe would weaken the euro further against the U.S. dollar, which rose to a 5½-month high against the currency yesterday. A strong greenback is bearish for gold and other commodities that are priced in U.S. dollars.
Japan's economy also declined in the most recent quarter, raising concerns that much of the developed world could follow the United States into recession, prompting a decline in demand for commodities.
"Clearly the sentiment is an increasing concern about the risk of a global recession and that's what's being reflected in financial markets," CIBC World Markets economist Avery Shenfeld said in an interview.
Mr. Shenfeld, however, said his firm still believes that commodity prices are poised to gain over the long term and that resource markets may be pricing in more doom and gloom than warranted.
Nonetheless, the selloff in commodities yesterday was sharp and severe. Gold futures, which hit a record of more than $1,004 an ounce almost exactly five months ago, traded as low as $777 an ounce. Gold is down nearly 5 per cent so far this year, on track for its first annual decline in seven years. New York Mercantile Exchange gold futures dropped 8.4 per cent for the week, the biggest retreat since 1983.
"The debacle was so swift that conventional terms like 'oversold' no longer apply," said precious metals analyst John Nadler at bullion dealer Kitco in Montreal. He said the rout will not likely end until the metal's price drops to "between $680 and $730."
What has happened is that speculative institutional funds that had flooded into gold, and particularly into exchange-traded funds for the metal, have decided to take the money and run, Mr. Nadler said.
That's because developments such as the U.S. credit crunch have failed to do as much damage as expected - thereby keeping gold's price moving up - thanks to intervention by the U.S. Federal Reserve Board and other central banks.
"The funds have said, 'You know what, we've had a great run for eight years, we've had a stupendous run for two years, so let's take some money off the table,' " Mr. Nadler said. "The amount that has come out has been big enough to create ... this vacuum, so that great sucking sound we hear is money getting up and going into liquid holdings. Obviously, the U.S. dollar is getting a good benefit out of it."
Oil fell sharply. Light, sweet crude for September delivery dropped $1.24 to $113.77 a barrel in New York. At one point, it slipped to $111.34, its lowest since May 2 and more than $35 - or 24 per cent - below the July 11 record of $147.
However, commodity prices remain well above historical averages. "We would have marvelled just a few months ago at oil above $100 a barrel," Mr. Shenfeld said.
The rebounding U.S. dollar is pulling other markets down
Oil is tumbling...
Continuous front-month contract, $U.S. a barrel, daily close
Yesterday's close
$113.77, down $1.24
Gold is following suit...
$U.S. an ounce, daily
Yesterday's close
$792.10, down $22.40
...And that hurts the TSX
Yesterday's close 13,096.70 down 262.21