Commodity Prices Fall as Fed Announces it may End Quantitative Easing

Due to concern over the possibility that the Federal Bank will end stimulus, and the worsening economic situation in China, commodity prices have fallen across the board, including gold, copper, and crude oil.

Chairman of the Federal Bank, Ben Bernanke, announced on Wednesday that bond purchases, which have helped to fuel global markets for some time, may be phased out. Bernanke said that the central bank, which currently buys around $85 billion of Treasury and mortgage debt every month, could begin to reduce this, with a target of completely ending all purchases by the middle of next year.

At the same time as this announcement from Bernanke, a private report showed that China’s manufacturing sector is shrinking, leading to fears that raw-material demand will begin to fall as well. As its economic growth slows, borrowing costs have also increased, as indicated by the seven-day repurchase rate which has risen to the highest level since 2006.

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Sterling Smith, a futures specialist at Citigroup Inc., commented that “investor sentiment has turned negative. The idea that the quantitative easing, sooner or later, is going to have to end, that has made inflation-oriented assets, commodity assets, very, very nervous.”

Michael Hewson, a market analyst at CMC Markets Plc., told Bloomberg on Thursday that “it’s not surprising that oil is lower when you look at the rubbish Chinese PMI data from last night. Added to that, you have Mr. Bernanke’s stimulus withdrawal that may affect growth in the U.S., and these two factors are enough to pull down prices.”

Bloomberg reported that the Standard & Poor’s GSCI Index fell 2.8 percent to 618.23, with all 24 raw materials tracked by the gauge declining. Gold futures fell 6 percent, silver dropped 9.2 percent, and crude oil was down 3.2 percent.

By. Joao Peixe of Oilprice.com