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January 3, 2009

Commodities may not recover after worst year

Commodities, until six months ago the darling of investors and an out-performing asset class, sealed their worst year on record with accelerating losses in the fourth quarter of the year, Reuters quoted data as showing Thursday.

Industrial metals, crude oil and even grains took it on the chin as the world fell into recession and investors sold anything liquid or risky to cover deepening losses elsewhere or sock away cash for a brighter day, wiping out six years of nearly unbroken gains in the space of months.

Commodities led the charge lower over the second half of the year with more than 50 percent plunge since July, double the decline in the US Dow Jones stock index , and some analysts say they will probably lag a recovery that is now expected to materialize only in the second half of next year.

"At the moment, confidence in the commodity market is short, definitely short. That confidence would start to be restored when we start to see a rebound in equity markets again," said Mark Pervan, head of Australia & New Zealand Bank Research.

"There are a lot of nervous investors, who in some cases probably are not prepared to wade back in until they see more signs of things recovering."

The five commodity indexes used most heavily by investors to gain exposure to raw material prices -- tracking energy, metals and agriculture markets -- showed an average 40.5 percent dive in the fourth quarter, taking the full-year fall to 42.35 percent.

Indices collapsed by more than two-thirds from their record highs in early July, suffering a 25 percent average loss in the third quarter -- the first negative performance for commodities after four straight positive quarters that had handed investors some of their best returns in 35 years.

With key equity indexes also posting their biggest quarterly drop ever -- the Dow Jones suffered a 34 percent fall, its third worst ever -- investors are now banking on a major economic stimulus package from US President-elect Barack Obama to minimise the severity of a global economic downturn.

"For the first quarter, I feel that commodity prices will stabilize as we prepare for a number of changes," said Adrian Koh, analyst at Phillip Futures in Singapore.

"Crude oil is becoming increasingly cheap as compared to other commodities and in the long-term, it should move higher. However, it's still on a sharp downtrend."

Obama has said signing a economic stimulus package will be his priority when he takes office on January 20, while one of his top economic advisers said financial policy should address both immediate job creation and longer-term investment needs.

The broad-based Reuters-Jefferies CRB index of 19 mostly US-traded commodity markets including oil, coffee, gold, corn and copper shed one-third of its value in the fourth quarter, its worst quarterly showing ever.

At its early July peak, the CRB had surged 250 percent since the start of 2002; by year end, it was up only 20 percent.

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