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.

The U.S. asset-backed commercial paper market has fallen for 11 consecutive weeks to $883.7 billion this week from a peak of $1.17 trillion at the end of July, according to data from the Federal Reserve.

In Europe, according to analysts at BNP Paribas, the market shrunk to $192 billion at the end of September from $297 billion at the end of July.

"I think there is probably fresh money coming in," said Michael Lewis, global head of commodities research at Deutsche Bank.

"After this summer, we have been encouraged by the diversification benefits of commodities and how well they performed during this period of financial market dislocation."

Data confirming an influx of new money into the commodity markets is difficult to come by.

Most look to weekly data from the U.S. Commodity Futures Trading Commission to gauge changes in investment volumes.

The CFTC reported that speculative bets on gold futures at the COMEX division of the New York Mercantile Exchange hit a record high last week as traders bet the market would rise further.