CHICAGO (Dow Jones)--Commodity prices are showing strength across the board Thursday, with crude oil helping to lead a rally that has pushed up raw materials price from copper to corn.
A weaker U.S. dollar, worries over the conflict between Russia and Georgia and the return of credit crisis woes have investors returning to commodities.
"When you look at the outside markets and everything in that commodity basket is screaming higher, (the rally is) very hard to ignore," said Shawn McCambridge, senior grains analyst at Prudential-Bache.
Some of this is due to a pause in the dollar's rally, said Zachary Oxman, senior trader with Wisdom Financial. The euro has been as muscular as $1.4890, compared to $1.4747 late Wednesday and Tuesday's six-month low of $1.4631. "Commodities have been slowly but surely strengthening over the past couple of sessions," Oxman said.
The rally in commodities Thursday comes after a sharp sell-off in several of the major markets. From its record high of around $147 a barrel to its low of around $113, the nearby New York Mercantile Exchange crude oil contract fell 23%. However, from that low set Aug. 15 to Thursday's high, crude has recouped nearly 8%.
That action is mirrored in other markets like corn and gold. Chicago Board of Trade December corn fell 37% this summer from its high to its low, but is up 24% from that low to Thursday's high. After nearly hitting $1,000 in July, Comex December gold slumped to $792.10 but has rebounded to $845, Thursday's high.
Much of the pullback in commodities came from speculative money fleeing alternative assets and a strengthening dollar. A strong greenback makes dollar-denominated commodities more expensive for foreign buyers.
In addition to the investment money coming back into commodities, the fund interest also keeps potential sellers on the sidelines, allowing grain futures to advance further, said McCambridge.
In some markets, fundamentals began to reflect a drop in demand as prices became too high. Yet as prices pulled back, end-user demand returned. For instance, the drop in corn prices rekindled buying interest by livestock feeders who saw an opportunity to price in a near-$3 a bushel price in the cost of the grain. Physical buyers of gold took advantage of a $300 drop in the price of the metal.
Thursday's break in the dollar - which is nearly a 3-cent retracement of its six-month high - has helped commodities across the board.
"This rally is definitely dollar-related, commodity-based buying with crude leading the charge," a CBOT floor trader said. "But the stock market's not under pressure; I'm miffed the stocks aren't taking this as bearish."
Worries about inflation are also underpinning commodities, Oxman said.
"A lot of people realize inflation is going to be a bigger issue. In that sense, people are rolling back into commodities," he said.
"People are really starting to realize the inflation is a lot more than what the Fed has been telling us."
Producer prices rose to their highest annual rate in 27 years according to data out earlier this week and before that the Labor Department said consumer prices were up at 17 year highs. If prices don't fall back that could spark concern in the market that Federal Reserve might not hold interest rates at current levels into 2009.
Funds that are buying commodities are making their purchases off concerns about the credit market and geopolitics, says Ralph Preston, senior market analyst with Heritage West Financial. That helps commodities like gold rise as it acts like a traditional store of wealth in uncertain times.
Still some analysts noted that even markets that don't have solid fundamental reasons to rise, like the softs, are rallying. "Sugar is being dragged along with other commodities," one analyst said. "There is nothing fundamental out there, it just looks like the perception towards commodities is changing."
-By Debbie Carlson; Dow Jones Newswires; 312-750-4072;
debbie.carlson@dowjones.com