The rejection by US law makers of a $700 billion rescue package for financial firms had hit both equity and commodity markets hard in recent days.

Over the longer term, studies show the relationship between commodity and equity prices is weak. But these are exceptional times, likened by some to the depression in the United States between 1929 and 1933 when the economy shrank by more than 30%.

Meanwhile, analysts are divided on the long term prospects of gold. For example, Salman Partners on Tuesday had revised their gold price estimate from $937 per ounce to $897 per ounce for gold in 2008 while its forecast for gold in 2009 has been downwarded to $950 from $1,025. Although other analysts are quite bullish on gold’s prospects in 2009.

Investors are looking at gold to moderate some of the risks in their portfolio. They are concerned mainly about counterparty risk, market risk and liquidity risk. Although gold does not necessarily remove the counterparty risk but negative real yields—the difference between interest rates and inflation—are also another reason to hold gold.

As far as silver is concerned, Salman Partners has predicted the full year average silver price down from $17.95 per ounce to $15.70/oz. Silver will gain strength from the current levels in 2009 when it could hover around US$14 per ounce and an average silver price of US $15.75.

Gold has so far been immune to the financial crisis except when dollar strengthened which made investments in gold less attractive. Gold hit a record high of $1,030.80 an ounce on March 17 and slipped to below $740 on Sept. 11 as the dollar rose and inflation worries receded.

One of the reasons behind the commodity prices surge in recent times has been the fall in value of dollar which made commodities priced in U S currency cheaper for holders of other currencies. But the dollar has staged a recovery as currency markets realized banking sector problems were contagious and would not be confined to the United States.

Meanwhile, Financial Times has reported that investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

It quoted Jeremy Charles, London Bullion Market Association (LBMA) Chairman,as saying that the demand was unprecedented and that refineries were unable to supply the required bars. Investors in some countries were paying a premium of $25 per ounce over London spot price to secure those scarce bars.

source www.commodityonline.com

There were major corrections in commodities prices, including precious and base metals and crude oil on Monday. Price of crude oil for October fell nearly 3 per cent on Multi Commodity Exchange. October contracts of base metals lost an average 2 per cent while precious metals December contracts lost just about 1 per cent.

Long-only money has shrunk by as much as $50 bn with the sharpest drops in agricultural futures and oil markets. Citigroup reported that the net long position since July collapsed to $8 bn from.

According to data released by Commodity Futures Trading Commission (CFTC) large outflows have occurred in agricultural index investments amounting to $1.44 bn last week reversing the inflows of 2007-08.

“Large outflows from agricultural index investments continue, this past week amounting to $1.44 billion,” UBS said, basing its estimate on data released by the Commodity Futures Trading Commission. “Over the past quarter, index investors have sold $9.1 billion worth of agricultural index positions, reversing the inflows of 2007 and 2008.

According to CFTC data, since August 2006, open interest in US crude oil has slipped to the lowest level for the week to September 23.

CFTC data for the week to Sept. 23the fortnight since the credit crisis escalated—shows open interest in U.S. crude oil dropping to its lowest level since August 2006. Among soft commodities, one of the sharpest drops in long positions has been in New York-traded raw sugar.

However not all commodities saw exodus of long money. Gold saw a jump of 38,361 net long contracts held by speculators which included index exposure.

Meanwhile, the reduction in steel production in China has hit Indian iron ore exporters hard.with many Chinese buyers defaulting on contracts with suppliers.

Author: Madhurima R S
www.commodityonline.com  

Crude slipped below $100 and hovered around $96 today. Oil firms rushed to their offshore facilities and coastal refineries to check for damage on Sunday after Hurricane Ike’s direct hit on the Houston energy hub. Early reports indicated little or no severe damage to infrastructure — signaling a possible quick recovery to production but firms warned that supply problems were likely in the near term. But the market will also be looking at the failure of talks to rescue Lehman as that might darken economic outlook and weaken energy consumption. China’s central bank cut the cost of bank loans for the first time since February 2002 to prop up the slowing economy. Militants in OPEC member Nigeria attacked a Royal Dutch Shell oil installation on Monday in a third day of heavy fighting with security forces.

Base metals capped earlier gains as the LME suspended Lehman Brothers Holdings Inc. from trading on the bourse’s electronic system after the U.S. bank filed for bankruptcy protection and investors remained cautious after Lehman Brothers filed for bankruptcy. Lack of demand from China, rising inventories and worries over the health of the global economy have helped depress metals in recent weeks. In aluminium, Texas’s alumina industry was restarting after coming through Hurricane Ike relatively unscathed and nickel makers in Cuba were also picking up the pieces after the storm. Copper slides to $ 6806, lead made a low of $1811, nickel take a dip to $17925 and zinc touch a low of $1710.

Source www.commodityonline.com