By Jason Simpkins
Associate Editor
Oil retreated again yesterday (Tuesday) on mounting recession fears while gold bounced back from a three-week low on as the Federal Reserve slashed interest rates by 75 basis points.
After falling as low as $86.11 in early morning trading, light sweet crude for February delivery settled at $89.85 a barrel on the New York Mercantile Exchange. It has dropped about 12% from its record high of $100.09 established earlier this month.
"We have long argued that a marked deterioration in the U.S. economy - or a perception of one - was the 'Achilles heel’ that could badly puncture the bull move in the commodity markets," Edward Meir, an analyst at MF Global UK Ltd., said in a research note.
The Organization of Petroleum Exporting Countries (OPEC), which was repeatedly asked to increase output as prices soared 60% in 2007, has now been afforded the shield of a possible U.S. recession.
"Combined with uncertainty impacting demand growth due to rising fears of a recession in the U.S. and economic slowdown in other regions, this has resulted in an even higher level of uncertainty for the estimated demand for OPEC crude," OPEC said in its monthly report.
Despite these developments, the group kept its oil demand growth estimate for 2008 unchanged. OPEC expects demand to average 87.07 million barrels per day.
Gold Gets Its Shine Back
As oil remained sluggish, gold regained some of its former luster. Spot gold rebounded from a three-week low of $849.50 per ounce, climbing $8.60 to settle at $890.30.
The Fed’s rate cut is what really woke gold from its slumber. Lower interest rates weaken the dollar and encourage investors to buy hard assets like gold, which is considered a safe haven, or hedge, against falling currencies and economic uncertainty. A weaker dollar also makes commodities cheaper for overseas investors.
"The gold market fell on equity worries but has come roaring back on the Fed rate cut," James Steel, analyst with HSBC, told the Associated Press. "That kicked the stool from underneath the dollar and really very swiftly reinvigorated gold."
Other precious metals dipped. Silver dropped 11 cents to $16.11 per ounce, while platinum fell $6.90 to $1,558.60 an ounce. Copper dropped four cents to $3.20 a pound.
News and Related Story Links:
- Associated Press:
Gold Jumps on Fed Rate Cut
- Associated Press:
Oil Prices Drop on Fears of Recession
- Forbes:
OPEC keeps demand growth forecast unchanged at 1.3 mln bpd