- The Washington Times - Tuesday, May 23, 2006

The prices of commodities from gold to copper to oil have taken a serious slide, even with yesterday’s bounce back, and the markets are wondering whether commodities have lost their momentum or are just taking a breather.

The answer has implications not only for the price of consumer goods, but also for people’s mortgages — if commodities resume rising and boosting inflation concerns, the Federal Reserve may keep raising interest rates.

Commodities have pulled back dramatically over the past week-and-a-half after hitting record highs: Gold prices were recently $657.50 an ounce after reaching a 26-year high of $732; silver was recently at $12.44 an ounce after reaching a 23-year high of $15.20; copper traded recently at $3.64 an ounce, down from more than $4; platinum was at $1,284.60 from a record $1,340.

Meanwhile, crude oil recently traded as low as $67.60 a barrel, down from a record $75.35 reached in April.

A few market watchers are saying commodities have peaked, but more are saying this is a consolidation period before commodities make another climb.

“We think they’re going to appreciate in the next year, and into the future,” said Larry Young of Infinity Brokerage. “People who were able to get some good profits in this first round of trading are just taking a pause.”

May and June are historically correcting months, said Frank Holmes, CEO of U.S. Global Investors.

“We just think this is a healthy, normal correction,” Mr. Holmes said.

If that’s true, the Federal Reserve — which has been steadily raising interest rates since June 2004 to a five-year high of 5 percent — will have a balancing act on its hands.

The relationship among commodities prices, inflation and interest rates these days is somewhat of a vicious circle: When there are fears of inflation, people have bought into the commodities market, and when commodities prices rise, it trickles down to the core inflation rate.

Last Wednesday, the Labor Department said the Consumer Price Index rose 0.6 percent, the biggest jump in three months, following an already strong 0.4 percent advance in March.

On the other hand, if interest rates rise too much, it could hamper consumer demand for goods.

For the Federal Reserve, this means a tough balance going into the next several months between staving off inflation and keeping rates low enough not to hurt consumers.

“Inflation’s really been locked into a very tight sector of the market, which has been commodities,” said Phil Flynn, analyst at Alaron Trading, noting that recently it’s started to affect the core inflation rate. “The Fed wants to keep inflation under control, but if it acts too aggressively, it could really hurt the economy. Consumers are already struggling with higher energy rates — they don’t need higher interest rates.”

Gerald Lucas, chief Treasury strategist at Banc of America Securities, said that while it’s still very uncertain, he believes the Fed is more likely to raise rates for a 17th consecutive time than to pause, despite commodities’ drop. “We don’t see this correction as a sign the Fed’s not going to,” Mr. Lucas said.

Consumers could feel the crunch if the Fed keeps raising interest rates and commodities resume their rise.

High platinum prices can hurt the already-struggling auto industry — nearly half of the world’s platinum supply is used in auto catalysts.

Surging copper prices can affect the price of electronics and construction — copper is used in electrical wiring, electronic goods, car radiators, home heating systems and water pipes.

And, of course, high energy prices are felt at the gasoline pump and during the winter heating months.

Mr. Flynn said he thinks the market can adjust to high commodities prices, pointing to strong economic indicators like job growth. He noted that demand for gasoline has slowed a bit, but that it could be transitory. “Now that consumers are paying well over $3 a gallon in some parts of the country, anything under $3 starts looking like a real bargain,” he said.

Even if demand slows, supplies also are seen as tight, which supports prices.

“There have been no major discoveries for commodities in the last 20 years,” Mr. Holmes said, adding that industry nationalization and labor strikes also can threaten oil and metals.

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