An interest-rate increase in Australia and worries over the weak U.S. economy sent the dollar lower and gold to record highs Tuesday, igniting waves of buying in the commodity sector.
A boost of a quarter point in Australia's target interest rate coupled with concern over the U.S. economy tugged the U.S. dollar lower against the euro Tuesday, causing traders to flee the greenback for the safety of gold. Gold futures, in turn, hit a record high above $1,044 an ounce, as worries over longer term inflation prospects, the growing U.S. deficit and chart-based momentum lifted prices.
The falling dollar and strong gold market helped push November crude oil futures up 2%, while speculative funds amassed in the benchmark commodity indexes, taking the entire sector higher, analysts said.
"Commodities are being viewed more and more as an asset class as an alternative investment, and there does continue to be a lot of uncertainty, a lack of real conviction as to what is going to happen down the line and how long it is going to take us to get out of all the problems we're in," said Bill O'Neill, analyst and a principal with LOGIC Advisors.
Those worries fed into the gold rally and encouraged bulls to buy, a move felt throughout the commodity sector.
"There is a general tidal wave higher, in other commodities as well," said Jim Steel, metals analyst with HSBC.
December corn futures on the Chicago Board of Trade are rallying 6%, wheat is up 3.3% and November soybeans are up 2.2%. December cotton on ICE Futures U.S. is up 2%, while December coffee was up 3.1%.
The benchmark commodity indexes were about 1%-2.5% higher as a result.
The Dow Jones-UBS Commodity Index gapped open higher and shot to a 2 1/2-week high of 128.274.
The Thomson Reuters Continuous Commodity Index notched more impressive gains, with speculative fund buying taking prices to a one-year high of 436.23.
The greenback was also hurt by speculation that Gulf Arab oil producers were in secret talks to replace the dollar with a basket of currencies to price oil. Persian Gulf leaders, however, strongly denied there existed any plans or had been any talks on the subject.
The basket, reported by British newspaper The Independent, would reportedly include the Japanese yen, Chinese yuan, euro, gold and a new currency planned by Gulf Cooperation Council members.
"That's not going to happen, and it's been denied," said O'Neill, though the speculation added an "air of uncertainty" around the U.S. dollar.
A weak U.S. dollar is constructive for commodities and their related indexes because it makes them cheaper for foreign investors.
The commodity markets continue to be marked by "extreme volatility," he explained, a trend likely to continue through the first half of 2010.
