PAGING PAUL KRUGMAN:

Commodity price tumble puts markets in tailspin (JOHN HEINZL, 5/16/06, Globe and Mail)

“It's beginning to look a little ugly,” said Elvis Picardo, research analyst and chief market strategist at Global Securities Corp. in Vancouver. “When sentiment shifts it happens very suddenly.”

Nowhere was the reversal more dramatic than in commodities, which plummeted amid concerns that rising interest rates could crimp global economic growth and curb demand for raw materials in countries such as the United States, China and India.

In London, gold fell 4.9 per cent for its biggest drop since 1993, while silver skidded 8 per cent. Copper, zinc and other base metals also fell sharply, as did crude oil, which slumped $2.63 (U.S.), or 3.7 per cent, to $69.41 a barrel on the New York Mercantile Exchange. The Canadian dollar shed 0.34 cents (U.S.) to 89.80 cents.

Underscoring worries about slowing economic growth, the International Energy Agency last week cut its estimate of global energy demand for the third time in four months, indicating prices are starting to cut into consumption.

Commodity prices had zoomed skyward on a combination of Asian demand, supply concerns and speculative buying by pension and hedge funds hoping to beat the returns on stocks. But the outsized gains in commodities have set off a growing chorus of warnings about an imminent correction.

“There is a danger that this is a bubble,” Donald Brydon, chairman of the London Metal Exchange, was quoted as saying in the Financial Times over the weekend. “There are a lot of new players in the market that need to be careful.”

The sooner the speculative commodity bubble is popped the sooner Ben Bernanke can start lowering rates.

Posted by Orrin Judd at May 16, 2006 9:38 AM