What goes up must come down

Commodities experienced a massive decline this week, with many markets undoing weeks of gains.

Crude oil, silver and soybeans experienced some of the largest drops, as the falling US dollar reversed course, gaining as much as two percent against other foreign currencies. This is significant because our commodities prices are denominated in US dollars, and a stronger dollar will tend to cause the price of all commodities to fall relative to the value of our greenback.

Crude collapses

Crude oil prices slid $20 per barrel (-17 percent) this week after popping to a two-year high on Monday morning. Some of this week's sell-off has been attributed to a perceived decrease in terror threat after Osama bin Laden's death, with analysts expecting that the global oil supply is now less likely to be interrupted by attacks.

The drop in prices accelerated on Thursday as the stronger dollar pressured prices and weak economic data from the U.S. Department of Labor showed increasing unemployment. As crude oil fell, so too did heating oil, diesel fuel and gasoline, with the fuels dropping over forty cents per gallon during the week.

Silver sinks

Silver prices had their largest one-week range since 1980, with prices plunging as much as $15.50 per ounce (-32 percent). The drop in silver was linked to an increase in margin requirements, the amount of money that an investor must have in order to trade silver. Those who couldn't meet the increased deposit requirements liquidated their positions, causing the selling to accelerate. By Friday morning, prices had fallen to $33.04 per ounce, at which time bargain-hunters stepped in with buy orders, halting the decline.

Soybeans Stumble

Soybean priced dropped nearly $1 per bushel this week alongside the larger commodity sell-off. Soybeans for July delivery fell to $13.06 per bushel on Friday morning, the lowest price in nearly two months. The selling was linked partially to a potential slowdown in Chinese demand, but also to expectations that the next U.S. soybean crop could end up larger than previously anticipated. As corn farmers continue to be plagued by wet weather and delayed plantings, some may switch to growing more soybeans, which can be planted later than the corn.

As is always the case, there are winners and losers from these large price movements. Those driving to see their mothers on Sunday could see lower gasoline prices this weekend, while farmers and investors holding stores of precious metals gave back a large portion of their recent gains. As of midday Friday, June crude oil was trading near $99 per barrel, July silver was at $35.40 per ounce, and July soybeans were hovering near $13.20 per bushel.