Credit crisis hurts commodity markets
- Sunday, October 26 - 2008 at 09:53
The global sell-off not only hits stock markets, but also commodities. Two weeks ago, the Dubai Financial Market (DFM) General Index tumbled to a multiyear low of around 3,000 points. The federal government of the UAE guaranteed all interbank lending between UAE-based institutions and all deposits held by UAE-based commercial banks.
So far in 2008, more than $25 trillion has been wiped off global equities.
Also commodities dropped severely, for instance price for crude oil WTI December delivery has fallen to under $60 a barrel on the New York Mercantile Exchange.
All commodities are down amid fears that a global recession is underway. Gold and Silver also plunged as investors sold the metals to cover losses in equity markets.
Even government bonds fell sharply. One trader stated: 'The world is going to cash and investors are selling gold to raise dollars. There's just massive selling across the board.'
This is a typical case of 'deleveraging', for instance financial institutions, hedge funds, and traders are forced to unwind losing positions in order to raise 'cash'. The rush for cash may also have been fuelled by rumours that global markets may close for several days to allow governments to take corrective action. Instead of tranquilizing the markets, the panic and uncertainty intensified.
International Monetary Fund (IMF) managing director Dominique Strauss-Kahn even said that 'the world financial system was standing on the brink of systemic meltdown, because of intensifying solvency concerns about a number of the largest US-based and European financial institutions.'
It is clear that the financial markets need to calm down and that confidence in the financial sector has to be restored. With a continuing credit crunch, a slowing global economy is inevitable which will result in a lower demand for oil. When the markets calm down and (commodity) prices stabilize again, I will return with some strategies. In this (irrational) environment, investing seems more a gamble than ever.
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