(Bloomberg News) Commodities dropped the most in seven weeks, paring this year's gains to 13 percent on speculation that economic growth will slow as central banks seek to cool inflation by raising borrowing costs.
The Standard & Poor's GSCI Index of 24 raw materials fell as much as 3.1 percent to 708.87, the biggest drop since March 15, and was at 711.89 as of 2:31 p.m. in London on Thursday. The gauge has retreated for four days, the longest losing streak since mid-March. Lead, cocoa, silver, cotton and Brent crude led the declines.
The European Central Bank President Jean-Claude Trichet said Thursday the bank will monitor inflation risks "very closely," suggesting it may wait until after June to raise interest rates again. The ECB raised interest rates on April 7, joining China, India, Poland and Sweden in seeking to control inflation. The cost of living in the U.S. rose at its fastest pace since December 2009 in the 12 months ended in March, the same month in which Chinese consumer prices rose by the most since 2008.
"This could be one of the most severe corrections that we've seen over the last year," said Sean Corrigan, chief investment strategist at Diapason Commodities Management SA, which has about $9 billion invested in commodities. "If things get really bad, we could possibly retrace half of the rally of the past six to nine months."
The slump in raw materials comes as Glencore International AG sells shares in an initial public offering which may value the Baar, Switzerland-based commodity trader at about $61 billion. Goldman Sachs Group Inc. in reports on April 11 and 15 told investors they should be "underweight" commodities in the next three to six months. The bank still expects commodities to advance about 10 percent over the next 12 months.
Crude oil fell 3.4 percent to $105.52 a barrel in New York trading, while Brent oil retreated 3.4 percent to $117.13 a barrel in London. Gasoline declined 2.7 percent to $3.2322 a gallon on the New York Mercantile Exchange and natural gas fell 1.2 percent to $4.522 for a million British thermal units.
"The market is clearly vulnerable," Corrigan said, adding that West Texas Intermediate crude may decline to $100 a barrel, and copper may drop to $8,000 a ton if selling picks up. "Gold would be the least of your worries, it's going to be the industrial cyclical commodities, it's going to be the coppers and the tins and the crudes that get hit the worst."
Copper for delivery in three months fell 3.3 percent to $8,824.50 a metric ton on the London Metal Exchange. Aluminum, nickel, zinc, tin and lead also retreated. Gold for immediate delivery declined 0.8 percent to $1,504.88 an ounce while platinum dropped 1.3 percent to $1,799.75 an ounce.
High commodity prices have yet to crimp demand as inventories are tight, and getting out now would be "premature," Hussein Allidina, the head of commodity research at Morgan Stanley in New York, said on April 29. Morgan Stanley, operator of the world's largest brokerage, is still "very long" crude and corn, and favors wheat and gold, Allidina said on April 29.