Commodity Prices Soar to Record Highs as Markets Grapple with Instability

By Jason Simpkins
Associate Editor

The prices for oil, gold, and platinum all hit record highs last week, as investors strengthened hedge positions against weaker equity markets and inflation.

"People want to get into commodities and damn the consequences. Given what is going on in other markets - equities are wobbly and some bonds are verging on toxic - people see commodities as a safe haven," MF Global Ltd. (MF) analyst Edward Meir told Reuters.

Oil prices closed at a record $100.74 a barrel on Feb. 20 amid signs that the Organization of Petroleum Exporting Countries (OPEC) would cut supplies. Though, they did experience a brief respite Thursday after the Energy Information Administration announced U.S. crude supplies were at their highest level since November.

Supplies climbed 4.2 million barrels, nearly twice as much as forecast, to 305.3 million barrels for the week ended Feb. 15.

Regardless of underlying fundamentals, more investment in oil seems likely as inflation spreads and equity investments lose value. Consumer prices rose 0.4% in January, the Department of Labor reported last week. Import prices also increased in January, rising 1.7%. The dollar has dropped about 8% since the beginning of 2007 when compared to a basket of trade-weighted currencies from major U.S. trading partners.

As a result, oil has averaged $93.02 a barrel this year, up nearly a third on 2007’s average of $72.30. Contrarily, the Dow Jones Industrial Average is down slightly more than 4.1% since February 23, 2007 and the Standard & Poor’s 500 Index is down about 8.7% in that time.

"Fundamentals have indeed loosened since the first time [West Texas Intermediate] hit 100 USD on January 2, 2008, and do not appear to justify this week’s record price levels" a report from Bank of America read. "Strength in prices across commodities indicates that the rally is likely fuelled by fresh inflow of capital as investors see commodities as an alternative asset class."

Those investors also helped gold and platinum soar to their own record highs last week. Gold rallied to $953.60 an ounce last Thursday, and platinum for immediate delivery advanced $37.50, to a record $2,206 an ounce. Platinum has gained 29% since Jan. 25.

"Crude oil is hitting $100 a barrel, corn, soybeans, and wheat are hitting a record high everyday, so precious metals are getting attention," Yuichi Ikemizu, head of commodity trading at Standard Bank PLC, told Bloomberg News.

Prices for gold and platinum have also gotten a boost from power shortages and flooding in South Africa, which forced mining companies to curtail energy usage by at least 10%.

"The platinum price has been driven to record levels by flooding and power shortages in [South Africa]. This has seen strong investor buying," Tom Kendall, precious metals strategist at Mitsubishi Corp. told Business Day.

Anglo Platinum (OTC:AGPPY) recently said output at its Amandelbult mine was diminished by flooding, and it may be three months before it comes back on line. The mine could lose 50,000 to 70,000 ounces of production, an amount comparable to four days worth of world supply.

South Africa provides four-fifths of the world’s platinum, and is second only to China in gold production. Given the current economic climate - and supply crunch - it seems like these commodities and others may have further to go.

Commodities are in their seventh year of gains as underinvestment in refineries, mines and land sent prices for oil, gold, platinum and wheat to record highs. About $175 billion is invested in commodities, according to Barclays Capital (BCS).

"There is a true shortage of capacity, the world is growing quickly and the only way to resolve the shortage is to have a very liquid market of commodities with a high level of participation," Francisco Blanch, head of global commodity research at Merrill Lynch & Co. Inc. (MER) told Bloomberg.

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