New York: The quiet trading in global commodities markets on the last day of 2008 wasn’t just the result of investors being on vacation—it was a sign that oil, gold, wheat and other futures had fallen from grace during a turbulent year.
Commodities surged during the first six months of 2008 on a combination of rising demand from growing economies including China and India and a huge wave of speculative buying. But in the second half of the year, futures plunged as major world economies fell into recession and speculators fled the market, hoping to avoid devastating losses.
The performance of crude oil was the most blatant example of what happened to commodities during the past year.
Price fluctuations: A file photo of a rig in Canada. Crude oil prices hit $100 a barrel on 2 January and soared more over the next six months. Norm Betts/Bloomberg
Crude hit $100 (Rs4,870) a barrel for the first time on 2 January and then soared over the next six months, hitting a once-unimaginable $147.27 on 11 July. Then the reality of a global economic downturn set in. Crude is down nearly 70% from its high.
Gold prices completed their eighth straight annual gain, finishing up $14.30 at $883.60 on the Nymex, but down from a record $1,033.90 reached earlier in the year. Gold began the year at $838, giving it a gain of 5.4% for the year.
The rally in commodities actually began in 2007, as demand from growing economies increased. Early in 2008, agricultural contracts, particularly wheat, also rose on bad weather in growing areas.
Meanwhile, many on Wall Street turned to the commodities market for safety during 2008 as the stock market buckled. As futures began to rack up gains, hedge funds and other big investors bought heavily, believing prices could only go higher and that this was the market where they could grab hold of some big returns.
But as it became clear that the recession was spreading around the world, stocksand commodities plunged together. As demand seemed to be waning for raw materials, so did speculators’ appetite for commodities; several hedge funds that bought at the top of the market, particularly in oil, ran into trouble and were forced to close.
Patricia Mohr, an economics and commodity market specialist at Scotiabank, called 2008 “a tumultuous one for commodity prices”. She said the “shift from boom to bust in many commodities has been the most rapid” the bank has seen in years.
“A spiralling down in business and consumer confidence, the intensifying credit crunch and a sharp, sudden slowdown in global auto sales and G-7 housing have contributed to the rapid deceleration, as has recent data from China indicating a marked deceleration in industrial activity,” Mohr said in a report.
Even when there are signs that the world economy is improving, many investors are unlikely to flood the market as they did in 2008. The billions of dollars lost as speculative buyers fled the market have left many investorshumbled. That will mean markets that are more orderly, perhaps even more sensible, which should help consumers and the overall economy. And there are already some signs of this. Plunging oil prices have already translated into lower prices at the pump.
Food prices, however, are not likely to follow energy in a rapid path downward. Although the prices for grains and other foodstuffs are down, there are many more factors, such as labour and packaging, that go into setting prices on grocery shelves.