Commodities price spiral: What next?

March 15, 2008

Commodities price spiral: What next?

By Nicholas Fang & Grace Ng


# How did it come to this?

As fears over a recession in the United States deepen, investors have been dumping the US dollar and US dollar-denominated investments and switching to other investments.

One of these is gold, always seen as a 'safe haven' for investors. It cruised past the historic US$1,000-an-ounce barrier this week.

Another big investment theme is commodities.

Red-hot economic growth in Asia and elsewhere in the world has also meant rising demand for oil, precious metals and agricultural produce.

As investors pile more money into commodities, prices rise even further.

Just this week, for example, crude oil hit an unheard-of US$111 (S$154) per barrel.

# How high will prices go?

Do not ask the analysts. These days, most are reluctant to hazard a guess.

This is especially so given the uncertain global economic environment and the continued financial upheaval in the US.

United Overseas Bank economist Ho Woei Chen believes demand for crude oil, diesel and petrol will fall as companies and consumers try to cut costs.

But she is not about to forecast the next price threshold.

'Previously, the breaking point for oil was US$100 per barrel and when we went past that, everything kept on moving...so it's very difficult to say where the ultimate threshold might be,' she said.

Mr Bill O'Neill, a managing partner at commodity research house Logic Advisors, expects gold to rise to US$1,100 an ounce in light of the US dollar's continued woes.

# How is this affecting people?

Consumers hit by higher prices may cut back or switch to cheaper alternatives.

For example, motorists here bought less petrol this year despite the car population growing by 17.5 per cent. Some have switched to lower, cheaper grades of petrol.

Savvy investors are cashing in on the commodities boom. Some are putting their money in gold certificates and unit trusts that invest in commodities, or stocks directly linked to the commodities boom.

Some people are still taking it all in stride. A Straits Times poll of about 30 people showed that most will continue drinking coffee, never mind the price rises.

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