Liquidity crunch, volatility to halt global commodity rally

Tight liquidity conditions coupled with extreme uncertainty in world financial markets are forcing bankers and financiers to liquidate their speculative commodity positions and drive down prices, according to analysts.

"The downward trend in commodity prices, especially agricultural commodities, is continuing to persist this week due to worsening liquidity conditions as well as uncertainty in financial markets, forcing bankers to liquidate speculative commodity positions," said a Geneva-based commodity trader.

ROADBLOCKS

In the next three quarters, gold may come down to $750 an ounce, oil to $75 a barrel

After a sell off in some stocks, the US dollar may see a rebound

Money from crude oil economies likely to find its way into the hammered global market

Grains, sugar to remain at highs on huge demand-supply differential

"Although there are acute shortages for most agricultural commodities in many countries which ought to have sustained high prices, the drop in commodities last week was primarily because of speculators acting on behalf of banks and financial institutions to liquidate positions," the trader said.

"If the current financial conditions persist, then commodities will come under increasing selling pressure," the trader said.

With energy and metals having recovered somewhat this week and grains futures continuing to show the downward trend, traders are not sure whether this is a one-time drop or the beginning of a downward spiral.

Oil prices, which fell to $103.23 from a high of $111.80 at one point last week, have now recovered because of the worsening crisis in Iraq. Oil prices touched around $107 a barrel following the developments in Iraq.

Wheat, maize (corn) and soyabean futures have fallen sharply on the Chicago board of trade, which is the global nerve center for grains and other agricultural commodities.

However, severe shortage of grains and cereals in many countries as well as rising demand for oil and metals in China would exert upward pressure on commodities, trade analysts said.

Gold has rallied to $935 a ounce from $910 last week. Base metals, too, have staged a recovery with aluminum rising 3.6 per cent to $2,935 a tonne and cooper adding 3.4 per cent at $8,097.50 a tonne.

Analysts also maintained that margin calls on hedge funds in stocks and bonds had prompted much of this week's reaping of profitable commodity positions, along with jitters about the financial stability of other brokers, according to a Reuters report.

Some economists argue that the current commodity price boom is due to the United States Fed's weak dollar policy. Despite the world economy having slowed down since September, commodity prices have surged in dollar terms.