Gold Falls Most Since 2006, Leads Commodity Drop on Fed Outlook

By Pham-Duy Nguyen and Millie Munshi

March 19 (Bloomberg) -- Gold plunged the most since June 2006, leading a decline in commodity prices on speculation that the Federal Reserve will ease the pace of interest-rate cuts, boosting the appeal of stocks and bonds.

The UBS Bloomberg Constant Maturity Commodity Index fell 51.7554, or 3.5 percent, to 1,437.64 at 11:42 a.m. in New York, led by declines in silver, gold, wheat, sugar and crude oil. The index of 26 commodities has dropped in three of the past four sessions and is down 8.6 percent from a record on Feb. 29.

The Fed yesterday cut the overnight-lending rate 75 basis points to 2.25 percent, the sixth reduction since September, in a bid to avert a U.S. recession. Analysts had expected a bigger cut to 2 percent, which helped spur commodities to record highs as investors sought a hedge against inflation by stocking up on raw materials.

``Market sentiment has changed to `maybe the Fed can bail us out,''' said Chip Hanlon, who helps manage $1.5 billion at Delta Global Advisors Inc. in Huntington Beach, California. ``It's a great excuse for anyone who's been a part of this commodity run to take some profits. It doesn't mean that people were wrong about the economy. It just means that they went overboard.''

Goldman Sachs Group Inc. and Morgan Stanley, the two biggest U.S. securities firms, said they were borrowing cash directly from the Fed, signaling the central bank's steps to ease borrowing restraints are working.

Reallocation of Assets

``There seems to be more stability in the credit market and the Fed keeps coming in to alleviate concern,'' said William O'Neill, partner at Logic Advisors in Upper Saddle River, New Jersey. ``There's a reallocation of assets taking place. Investors are taking some money out of commodities and gingerly moving in into equities.''

The Standard & Poor's 500 Index rose 0.4 percent to 1,335.87, after yesterday's 4.2 percent gain, which was the most since October 2002. The Dow Jones Industrial Average gained 0.2 percent.

Gold for April delivery fell $57, or 5.7 percent, to $946.20 an ounce on the Comex division of the New York Mercantile Exchange. A close at that price would mark the biggest drop for a most-active contract since June 2006. Gold reached a record $1,033.90 on March 17.

Crude oil for April delivery fell $4.31, or 3.9 percent, to $105.11 a barrel on the New York Mercantile Exchange on forecasts that a government report today will show U.S. inventories increased as the world's biggest economy slowed.

Risk-Reward

``The dynamics aren't there to push commodities higher at this point,'' O'Neill said. ``Some investors have had huge profits in oil, platinum and gold. At this point, the risk- reward gets a bit unattractive.''

While the Fed said yesterday it expects a ``leveling-out'' of commodity prices, some investors are betting inflation will accelerate because of lower borrowing costs.

``Commodities will resume their rally as the Fed continues to print more money,'' said Michael Pento, a senior market strategist at Delta Global. ``Commodities are priced in dollars, as the dollar continues to fall, these prices will regain their upward trend.''

To contact the reporters on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net; Millie Munshi in New York at mmunshi@bloomberg.net