Fed comment,China factory data send commodities crashing

Commodities crashed on Thursday on a sell-off stoked by the Federal Reserves explicit signal to end the era of easy money and a fresh evidence of a slowing China,with many analysts predicting a protracted bearish cycle for the market.

Commodities crashed on Thursday on a sell-off stoked by the Federal Reserves explicit signal to end the era of easy money and a fresh evidence of a slowing China,with many analysts predicting a protracted bearish cycle for the market.

Gold tumbled to 33-month low intraday,crude oil witnessed the maximum daily fall in more than a month,copper dropped to a one-and-a-half month low and aluminium slid to its lowest in three-and-a-half years.

However,with rupee hitting a record low,the benefit of lower commodity prices for India will be limited,say analysts. Rupee has depreciated nearly 9% this year.

The Thomson Reuters-Jefferies CRB index,which tracks the price movement of 19 commodities,dropped 1.5% intraday to 283.80. The index fell 4.8% so far this year.

Fed chairman Ben Bernanke said on Wednesday the US economy was staging a strong enough recovery for the central bank to start curtailing its $85-billion bond-buying stimulus a month later this year. Feds bond buying has largely supported commodities by lowering the value of the dollar and making assets priced in dollar cheaper for holders of other currencies. Adding to the market woes,latest data revealed Chinas factory activity slumped to a nine-month low in June,raising the risk of a sharper slowdown in the second quarter.

Commodity prices,after enjoying a historical bull run,are likely to be subdued for years to come. Since most Asian economies are net importers of commodities,a benign price outlook would unambiguously lower inflation,raise growth and improve external balances. Countries heavily invested in the business of exporting commodities,however,will face adverse headwinds, said a Deutsche Bank report.

Of the major commodities,I think gold is going to be the worst affected. Crude can be sideways-to-bearish as the commodity may gain from any solid indication of a revival in the global economy. Copper is going to see a bearish phase as the market is awash with supplies,thanks to the big investments in copper mines over the past few years when prices were high. Moreover,slowing manufacturing in China will drag copper demand, said Kishore Narne,associate director head – commodity & currency,Motilal Oswal Commodity Broker.

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Spot gold breached the April low of $1,321 an ounce and hit $1,295.74 an ounce intraday,weakest since September 2010,before paring some losses. Spot gold lost 3.5% at $1,302.90 an ounce at 1141 GMT and US August gold futures shed $71.40 an ounce at $1,302.60.

Benchmark three-month copper on the London Metal Exchange dropped over 2% to $6,802.75 a tonne,lowest since May. Brent lost $1.74 to $104.38 a barrel by 1142 GMT,and the US oil fell $1.42 to $96.82. Brent crude oil touched as low as $103.83,the lowest intra-day price since June 13.

Narne said the psychological barrier for gold could be $1,180 an ounce this year,while copper may test the $6,200 tonne level.

Recent developments in China and the sluggish and fragile growth elsewhere continue to suggest the risks to the commodity complex in H2 (of 2013) are hinged to the downside, said a Credit Suisse report. China accounts for 25% of the worlds commodity demand.