The biggest commodity collapse in at least five decades could signal Federal Reserve Chairman Ben Bernanke has revived confidence in U.S. financial firms.
The Standard & Poor’s 500 index posted its first weekly gain in a month and the dollar leapt from its lowest level since 1973 this week after the Fed stepped in Sunday to rescue Bear Stearns Cos. and expanded its role as lender of last resort to embrace the biggest dealers in Treasury notes.
Investors who had poured money into gold, oil and corn, seeking a hedge against inflation and a weak dollar, sold commodities to raise cash or buy stocks. The Reuters/Jefferies CRB index of 19 commodities tumbled 8.3 percent this week, the most since at least 1956.
“Bernanke took care of the commodity bubble,” said Ron Goodis, the retail trading director at Equidex Brokerage Group Inc. in Closter, N.J. “Commodities are coming back to earth. The stock market looks OK, and Bernanke is starting to look a little better.”
Gold had its biggest weekly loss since August 1990 after reaching a record $1,033.90 an ounce Monday. Oil plunged almost $10 over three days, after rallying to $111.80 a barrel, the highest ever. Corn dropped more than 9 percent for the week, the most since July.
Until this week, commodities had outperformed stocks and bonds as the Fed reduced its benchmark rate five times since September, eroding the value of the dollar and fueling concern that inflation would accelerate. The fifth cut, made this week, reduced the Fed’s benchmark rate to 2.25 percent from 3 percent.
Because commodities such as oil and gold are priced in dollars, they have risen as the U.S. currency has weakened in response to the Fed’s previous rate cuts.
“The markets have been buying euros against the dollar, buying oil and buying gold as hedges,” said Andrew Busch, a global currency strategist at BMO Capital Markets in Chicago, a unit of Bank of Montreal. “The Fed calmed the markets.”
Bernanke is expanding the Fed’s monetary-policy tool kit as he seeks to keep strains in financial markets from spiraling into a full-blown meltdown. The world’s biggest banks and securities firms have reported $195 billion in asset write-downs and credit losses since 2007 stemming from the collapse of the U.S. subprime mortgage market.
Fed officials on March 11 announced a program to swap $200 billion in Treasuries for debt including mortgage-backed securities. On Thursday, the Fed expanded collateral eligible for its auction of Treasuries to include bundled mortgage debt and securities linked to commercial-property loans. On Friday, it said it had lent $28.8 billion to large U.S. securities firms, its first extension of credit to non-banks since the 1930s.
Not everyone is convinced that Bernanke has managed to turn the tide for financial firms.
“He has taken extraordinary measures, things that we haven’t seen since the Great Depression,” said former Fed Vice Chairman Alan Blinder, a Princeton University professor. “He’s working overtime, literally and figuratively, to get this panic under control. But so far, it’s not under control.”
