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Investors rush for commodities as oil hits $100 - extended

Investors poured money into commodities on Wednesday amid deepening fears about the weakness of the US dollar, as the crude oil prices briefly hit the $100 a barrel mark and gold prices jumped to an all-time high. German expert says oil prices likely to double in 10 years.

The $100 a barrel level was reached as the result of a single trade by two independent traders - known as locals - at the Nymex floor, industry sources said. Before the trade, oil prices were at $99.53 a barrel. In spite of the controversy about the single trade, crude oil closed up $3.64 at $99.62 dollars a barrel in New York. The dollar fell to $1.4750 against the euro and the sterling went down to one pound against 1.97345, or 0.40% lower against the dollar by 11 a.m. Greenwich mean time, after weaker than expected purchasing managers’ data suggested the UK economy may also be facing a more severe slowdown than thought. Spot bullion prices in London hit a record $861.10 an ounce, above the previous peak of $850 an ounce reached in January 1980.

Gold was boosted by political tensions in Pakistan and the search by investors for hedges against inflation and further dollar weakness, according to a Financial Times report. People seem scared from a number of factors - an inflation spike, further US dollar weakness or systemic financial risk, a former UBS metal strategist said. Crude oil prices were also boosted by, among other reasons, the renewed tension in Nigeria, Africa’s biggest oil producer. The oil price rally soured the first stock trading day of the year, with the Dow Jones Industrial Average closing 1.7% lower, its worst start since a slide of 1.9% on the first day of trading in 1983.

Investors bet that the Federal Reserve would be forced to lower interest rates in response to economic weakness, potentially increasing the downward pressure on the dollar. The Institute for Supply Management said that it’s manufacturing index for December fell to 47.7, its lowest level since April 2003 and well below 50.8 in November. A reading below 50 indicates a contraction in activity and has historically served as a harbinger of recession. TJ Marta, fixed income strategist at RBC Capital Markets in New York, said, “A further decline in the overall index below 45 would be consistent with the recessions of 1990-91 and 2001.”

Minutes from the Fed’s meeting in December, released Wednesday, revealed that policy-makers “agreed on the need to remain exceptionally alert to economic and financial developments and their effects on the outlook.” The minutes said “members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen.” Investors sought the safety of government bonds, sending the yield on the policy-sensitive two-year Treasury down to 2.88% from 3.02%. Interest rate futures fully priced in a quarter-percentage point rate cut to 4.0% by the Fed by the end of this month. The US data also put pressure on stocks in Europe, with the FTSE 100 off 0.5% and the FTSEurofirst index falling 1.2%.


Claudia Kemfert of German economic research institute DIW told newspaper Berliner Zeitung that the oil prices could double to $200 per barrel within 10 years. “Oil reserves are becoming increasingly scarce, which will further drive up the prices,” Kemfert said. The German expert said the recent record oil price was largely attributed to market speculation, adding that the oil price could rise to $150 per barrel in five years. “The share of the oil price that is derived from speculation is around 20%,” she said. The expert said she does not expect an ease of oil prices in the coming weeks, considering the financial crisis in the United States and political turmoil in some oil producing countries like Algeria and Nigeria.

The oil price may continue to rise up to $105 per barrel in the short term, she said. However, Eugen Weinberg, a raw material expert of the German Commerzbank said he remains skeptical of a further rise of oil prices. The market is “very optimistic” for all raw materials, including oil and gold, but “the market only want to see a three-digital number, which is like a magnet,” Weinberg told Handelsblatt newspaper. Now the price has a tendency to go down, he said. (