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| Investors rush to safer places |
| Rajesh Bhayani / Mumbai Nov 28, 2009, 00:47 IST |
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Global commodities experienced a steep fall today, as investors and hedge funds across regions unwound their long positions after the news of Dubai’s debt crisis. Most commodities were down today between three and five per cent as the dollar strengthened. In late afternoon trade, however, prices recovered.
The S&P GSCI index of commodities fell as much as 4.2 percent, the steepest decline since July 29. The index, however, recovered somewhat, being down 3.15 per cent after afternoon trading in London.
Gold and crude oil had been seen as the best currency hedge but today’s fall, according to some traders, has ended this hope. All these happened today as Dubai World, the government investment company burdened by $59 billion of liabilities, sought to delay repayments. And so, raising concern that further worsening of defaults (due to payments getting delayed) may hold back global recovery, with fear of spillover impact.
At one time, crude oil went below $73, while gold was traded below $1,140. Later in the day, however, crude oil recovered to near $75 and gold to $1,160. Indian gold, in Mumbai, closed Rs 275 lower at Rs 17,615 for 10g.
Experts say one important reason behind today’s fall in commodities and other markets is unwinding of the carry trade in US currency. Reflecting this trend, the dollar index (index of the exchange rate of the dollar vis a vis a basket of other major currencies) went up by one per cent. Later, it gave up some gains and was trading 0.63 per cent higher, at 75.30.
Interest rates in the US have been near to zero. It was remunerative to borrow in dollars and buy other assets, as most assets, be these commodities or equities, were available cheap after last year’s crash.
“The debt crisis in Dubai compelled investors to book profit and pay back dollar debt, by unwinding carry trade,” said T Gnansekar, director of risk advisory agency Commtrendz.
Last year, most institutional investors incurred heavy losses and paid a price for not booking profits before the crisis that began with the fall of Lehman Brothers.
Gnansekar believes that booking profit in other assets and buying dollars may continue for some more time. Some metals gave over 100 per cent returns in 2009.
Jayant Manglik, president, Religare Commodities, said “Dubai development was the trigger to move money to safe assets and the options with them were either to buy dollars or gold.” Today, money moved to dollars but Manglik feels in the next two working days, things will be clear whether the crisis is confined to Dubai or is spreading. If it spreads, investors will have to reassess the situation and decide which is the safest place to park profit. He feels gold will remain in the limelight, as a safe asset.
Copper and aluminium prices fell nearly three per cent on Friday, to two-week lows. Three-month copper on the London Metal Exchange was trading at $6,683 a tonne, compared with $6,904 at the close on Thursday. Aluminium was at $1,979 a tonne from $2,009. In morning trade, it hit $1.950 a tonne. Nickel also fell nearly five per cent, to $15,751 a tonne from $16,775 at the close on Thursday. Lead and zinc prices tracked copper and fell on Friday, by eight and five per cent, respectively. Lead on the London Metal Exchange hit $2,145 a tonne from $2,344 a tonne at the close on Thursday and zinc touched $2,130.
Soybeans, corn and wheat slumped, after Dubai’s bid to reschedule debt sent equities tumbling and eroded investor confidence in commodities. Soybeans for January delivery lost as much as 3.2 percent to $10.21 a bushel, the most for the most-active contract since October 2, on the Chicago Board of Trade and were at $10.23 at 3:59 pm Singapore time.
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