• Home
• /
• Business

Demand woes trigger fresh sell-off, gold sinking below $800

LONDON - Commodities markets tumbled across the board on Friday, with gold sinking below $800 an ounce to almost a nine-month low as evidence mounted that slowing economic growth was hitting global demand.

Crude oil fell towards its weakest point since May, copper dropped more than 2 percent, while silver plummeted 12 percent in Asian trade as the dollar gained on gloomy economic outlook from Europe.

"Demand is a key driver here," said Daniel Brebner, global head of commodities at UBS. "The key concerns are over Western economies, perhaps more importantly emerging economies and predominantly China -- where growth has been slowing."

The Chinese economy grew at a rate of 10.1 percent in the second quarter of this year -- still very high compared to single-digit growth in Europe, but slower than 12.6 percent in the same period last year.

Also adding to the gloom was the dollar's strength against major currencies, making dollar-denominated commodities more expensive. The U.S. currency rose to a six-month high against the euro and a seven-month high against a basket of major currencies.

Several commodity analysts do not see the dollar as a major reason for the fall, but say it puts further pressure on the downside.

"We are really not that convinced of the long-term dollar strength crushing commodities and being negative to commodities returns," said Michael Lewis, global head of commodities at Deutsche Bank. "Certainly at the moment there seems to be a link between the two but we are not convinced."

Gold is among the most sensitive to the dollar. The yellow metal dropped almost 5 percent to near a nine-month low of $773.90 an ounce, below the key $800 an ounce level for the first time this year.

"Dollar strength makes gold less attractive for investors. Near-term price movements will continue to be driven by movements in the dollar," analyst Marc Elliott at Fairfax said.

Gold's drop dragged down all precious metals with silver plummeting by 12 percent and palladium 3 percent to its weakest in nearly two years. Platinum was also down 2 percent.

Crude oil was down by $2 to around $113 a barrel, having fallen sharply since reaching an all-time high of $147.27 a barrel on July 11. Oil-heavy Reuters-Jeffries/CRB index, which has fallen almost 18 percent since July, was down almost 1 percent.

Correction

But several analysts believed it was too early to give up on commodities, saying the recent sharp falls were a correction after a breathless rally and the demand outlook remained robust.

"(For oil) it is a correction that we are seeing," said Lewis. " The inventory on oil makes us feel this is not the market going back to $80," Lewis said.

A larger-than-expected drop in U.S. crude and gasoline inventories triggered a short-lived rally in crude oil prices on Thursday.

"In terms of oil, we don't thing the fundamentals are that bearish," Lewis said. "Chinese demand -- we still feel that is pretty strong."

Falling crude oil prices dragged down palm oil futures.

Malaysian crude palm oil futures plunged 8.7 percent to an 11-1/2-month low as falling crude knocked vegetable oil markets, prompting Chinese and Indian traders to renege on palm contracts.

Agricultural commodities were not spared either. September corn futures were trading at $5.38 per bushel in electronic trading, down 3.5 percent or 19-3/4 cents from Thursday's Chicago close.

European grain markets opened weaker in sympathy with Chicago markets. French November wheat was down 0.75 to 196.00 euros per tonne while London November wheat was down half a percent at 127 pounds a tonne in light volume of 40 lots.

"Agricultural products are basically catching up (with) the falls in other markets," a commodity broker in Perth said.

Soft commodities tracked the falls, too. London November down $35 or 1.6 percent to $2,203 a tonne while December cocoa fell 24 pounds to 1,463 pounds a tonne.

"The stronger dollar is having an effect on prices in the short term," a London-based robusta coffee futures trader said, "We're in long liquidation mode."