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Rate cut cools off commodities markets

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KAI RYSSDAL: I know I poo-pooed them a minute ago — but just as points of reference, here’s where oil and gold closed today: Crude dropped 70 cents to $101.84 a barrel. Not a huge selloff, sure, but at one point this morning it was under $99. Gold was down near $900 an ounce earlier. It closed off 3 percent at about $920.

Monday, we were talking about thousand-dollar gold and oil above $110. Wheat, corn and copper are just some of the other commodities that have been rising at record rates the past six months. But this week, those prices have been headed the other way.

We asked Marketplace’s Alisa Roth to find out what pushed them up to begin with, and why they are falling now.

Alisa Roth: It’s hard to talk about commodities as a single entity. After all, the market for pork bellies is very different from the market for gold, or grain — which is what was being sold in the background at the Chicago Board of Trade when I talked to Victor Lespinasse today. He’s with Grain He says there are some common factors to the big movements in commodities prices:

Victor Lespinasse: These hedge funds have been big buyers of numerous commodities — metals energy, grains and others.

And not just hedge funds… Regular old mutual funds and pensions have been getting in on the game, too. James Mound writes a newsletter about commodities. He says investors have been betting that demand for commodities will keep rising in the future. Based on one simple thing:

James Mound: Which is growth of foreign countries like China. And that’s supported by the fact that we’ve had a weak U.S. dollar.

That weak dollar attracted foreign buyers to the American market, because it made commodities cheaper. But when the Fed lowered interest rates on Tuesday, the dollar got stronger. So now commodities bought in the U.S. are more expensive for foreign buyers. They’re backing out, and bringing domestic investors with them. That’s made commodities prices fall.

So where’s all the money going? Mound thinks a lot of people are just hanging on to the cash until they decide if they should put their money back in.

Mound: It’s certainly not in real estate, and it doesn’t appear to be in the stock market. You could make an argument that people are moving their money into treasuries.

Though treasuries may lose their appeal, he points out, with interest rates as low as they are.

In New York, I’m Alisa Roth for Marketplace.

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