Dollar at 12-month high. Gold plunges. Resource stocks dive

Blood on the streets again, as commodity prices tumble all over; oil trades at USD 105 a barrel, gold plunges to USD 791 an ounce, and resources stocks eat dirt.

JOHANNESBURG - 

The headlines on Tuesday may well read "oil slides USD 10 a barrel" on a weakened Gustav hurricane hitting the US mainland, along with gold bullion falling nearly USD 40 an ounce, but there is a much bigger story going on in the background. On Tuesday, the dollar index, a trade weighted measure of the greenback's value, moved to a 12-month high, at 78.3 points, triggering fresh slides in dollar commodity prices, weighing down heavily, in turn, on the pricing and valuations of listed resources stocks.

Most commodities are quoted and traded in dollars; the dollar generally moves in the opposite direction of dollar commodity prices. Recent moves in the dollar have been the fiercest in years.

The dollar index has rallied nearly 8% since hitting its most recent multi year low on 14 July 2008, when crude oil traded at record levels of USD 146.13 a barrel, and gold bullion changed hands just below its March 2008 record price of USD 1002.95 an ounce. On Tuesday, as the dollar made 12-month highs, sweet, light US crude oil futures changed hands as low as USD 105.46 a barrel, while gold traded down as low as USD 791.24 an ounce.

Platinum prices moved down by more than USD 53 an ounce, decisively below the USD 1,400 level, to change hands at USD 1,386 an ounce, nearly USD 1,000 lower than its record highs of USD 2,302 an ounce, seen in March this year. Silver, palladium and rhodium were also sharply lower. Key base metals were also moving lower.

Ahead of the opening of US equity markets after Monday's holiday, further profit-taking had already set into listed resources stocks. In Australia, BHP Billiton closed down more than 4%, while Tier I gold names Newcrest and Lihir finished 5% to 6% off opening prices.

In later trade in London, diversified heavyweights BHP Billiton, Rio Tinto and Anglo American were trading between 3% and 4% down, while base metal names such as Antofagasta, Vedanta, and Kazakhmys were falling by similar amounts. A number of platinum names were trading impressively down in London and Johannesburg.

The opening of markets in the Americas heralded sharp stock price losses for resources heavyweights across the board, from Vale to PotashCorp, from Mosaic to Freeport McMoRan, from Barrick to Goldcorp, from Exxon Mobil to Chevron, from Petrobras to ConocoPhilips, and from Silver Wheaton to Pan American Silver. Coal names were particularly heavily sold down, with Peabody and Consol falling nearly 10%, and Arch Coal by more than that.

On Tuesday, the dollar was trading at 1.448 to the Euro, well off the record 1.60 low seen just months ago. The greenback was at 1.785 against the British pound, well below the recent record low 2.12 level. While few serious economists or analysts would pretend to be able to make accurate calls on the dollar's future value, the current consensus view, if that exists at all, is that the slowing in the global economy is now feeding into economies beyond the US, which led the process.

Amid tumbling commodity prices, global inflation fears are off the boil for now, and central bankers are increasingly under pressure to cut policy interest rates. For months, US rates have remained cut to the bone, such that rate cuts in other jurisdictions would increase the attractiveness of the dollar. This is bullish for the dollar, and bearish for dollar commodity prices, and further bearish for commodities as hedges against inflation, now on the wane.

The most recent impetus for dollar strength has come from the UK, when the fallout in the domestic housing market is only gaining momentum, with highly likely dramatic knock-on effects for the overall economy. The Bank of England will be increasingly pressured into aggressively lowering interest rates, to limit the fallout in the overall economy, as in the US. Across the channel, the Euro zone is delivering increasing batches of gloomy economic data, thus also turning an increasing shine on the dollar.

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