Going down: what’s pushing oil, gold and silver prices lower

Bleak US labour data may be driving this week’s commodities sell-off. AAP

There has been a dramatic fall in the price of oil and some commodities over the last few days, with oil plunging by as much as 10% per cent in US trade overnight.

The price has recovered somewhat this morning, trading up 1.3% in Singapore, but in less than a week it has fallen from above US$110 per barrel to somewhat less than US$100.

Meanwhile, silver has plunged more than 10% after reaching record highs last week and and gold has gone from US$1500 per ounce to around $US1470.

There have been sharp falls in other commodities that have seen huge price rises in recent months, such as copper, coffee and sugar.

This has been accompanied by some strengthening in the US dollar relative to the euro and the pound.

How can we explain these sudden falls?

The question is whether these adjustments reflect some sort of fundamental change in investor assessment of world risk or whether a more mundane, though very important, economic explanation exists.

Some would argue that the world is a less risky place with following the death of Osama bin Laden.

Certainly, the fall in gold and silver prices is difficult to explain without some reference to world risk. The two precious metals are seen as safe-haven investments in times of enhanced risk, when bonds and equity markets tend to become volatile.

The killing of bin Laden may have encouraged sell off in gold and silver as emboldened investors – who have enjoyed massive returns over the past year – look to take their money elsewhere.

Yet, if there has been a movement of cash out of gold and silver, it does not appear to be entering the share markets – the US share market has fallen steadily over the past week. Wall Street closed down 2.3% last night.

It is possible that cash has been shifted from gold and silver markets into the massive bond market that exists at present, which suggests a somewhat more muted investor response to changes in the world risk.

But it’s difficult to chart the flow of funds into bonds because debt markets aren’t as transparent as share markets.

Recent US labour statistics might provide a more telling reason for the oil-price drop.

The economy is not growing as quickly as expected and this is a severe problem for commodity markets.

The US is still an economic powerhouse and even small changes in US domestic demand can have considerable impact on world commodity market.

High unemployment results in lower consumer spending, so there may be less demand for petrol than expected from US consumers heading into the northern summer.

US drivers are now paying almost US$4 per gallon (3.78 litres).

The steady fall in copper and live cattle prices over the last month adds further support to this argument.