Liquidity boom sparks lively commodities rally

By Randy Fabi and Atul Prakash - Analysis

LONDON (Reuters) - A liquidity boom, fuelled by lower U.S. interest rates and a flight from asset-backed commercial paper, has sparked a vivacious rally in the oil and commodity markets.

Oil has surged 30 percent and gold 20 percent since the Federal Reserve cut interest rates in mid-August and central banks pumped billions of dollars into financial markets to ease a liquidity crisis.

Money that was invested in discredited asset-backed commercial paper appears to have found a new home.

"This is largely a liquidity play and you can trace a lot of this back to when the Fed cut rates," said Neil Mellor, currency strategist at Bank of New York Mellon.

U.S. crude futures climbed to a lifetime peak of $92.22 on Friday, while gold surged to a 28-year high on expectations that the Federal Reserve would further trim interest rates at its policy meeting next week.

"In a high global liquidity market, money floods into every asset that isn't nailed to the floor and oil, along with gold, counts among them," Mellor said.

OIL, GOLD RUSH

Amid the credit market crisis, investors have fled fixed income and taken their billions of dollars to high-risk emerging market equity and commodity funds.