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Oil Report

COMMODITIES-Oil, metals fall on inflation, fear; gold up

 * Physical gold demand rises sharply in 2nd half of 2008.
 * Oil slides towards $34
 * Aluminium inventories at record high
 
 By Sue Thomas
 LONDON, Feb 18 (Reuters) - Oil, most industrial metals and
grains fell on Wednesday as worries over a deepening recession
and high inflation sent investors rushing to the safe haven of
gold which rose to a seven-month high.
 U.S. oil prices slid towards $34 a barrel, extending
Tuesday's nearly 7 percent losses, on slumping demand and
bloated inventories. [O/R]
 U.S. crude CLc1 for March delivery fell 17 cents to $34.76
a barrel at 1233 GMT, while London Brent crude LCOc1 for April
delivery rose 48 cents to $41.51 a barrel.
 Spot gold XAU= hit a high of $973.50, its strongest since
July 22, and was quoted at $964.60/966.20 an ounce at 1227 GMT
down from $968.35 in New York on Tuesday. Analysts said gold was
gathering steam to head higher.
 "We believe this is purely a flight to safety, with people
desperate to put their money somewhere they can get liquidity
and get their money back," Standard Chartered analyst Daniel
Smith said.
 The ratio of gold to oil, an indicator of how bad a
recession is and whether the outlook is deteriorating or
improving, widened on Wednesday to 28 for the first time since
1988, according to Reuters data. The ratio has doubled in the
past two months.
 Gold is often viewed as a hedge against inflation and
economic turmoil. During the early 1980s, the price of bullion
also surged because of intense inflation fuelled by an oil
supply crisis in the Middle East.
 Diversification into gold out of traditional asset classes
such as stocks, bonds and currencies by many non-gold investment
funds has driven holdings of the popular bullion-backed,
exchange-traded funds (ETFs) to record highs.
 A World Gold Council report released on Wednesday showed
physical gold demand rose sharply in the second half of 2008.
Identifiable investment demand for gold, which includes ETFs,
bars and coins, was up 64 percent in 2008 over the year before.
 
 SCARED
 "People are worried about their assets, worried about their
savings, and scared about the banking system, and they are
looking for protection," the council's investment research
manager Rozanna Wozniakshe told Reuters.
 "Further out, there is still the prospect of inflation,
particularly given that many governments are having to fund very
large fiscal deficits." [ID:nN17391802]
 The U.S. government will need to borrow more than $2
trillion to finance a bank rescue plan and to enact an
aggressive package to stimulate the world's biggest economy and
help reverse a global slowdown. [ID:nLA780849]
 The slowdown has devastated demand for most commodities, and
physical stocks are piling up in warehouses and pushing down
prices.
 The U.S Energy Information Administration will release its
weekly inventory data report on Thursday, but a Reuters poll of
analysts on Tuesday showed an average forecast for an increase
of 2.6 million barrels, nearing an 11-year high. [EIA/S]
 Aluminium prices fell after inventories jumped to a record
high. Aluminium, used in the auto and construction industries, 
has lost more than half of its value since July 2008, putting
pressure on major producers. [MET/L]
 Norwegian aluminium producer Norsk Hydro's NHY.OL
fourth-quarter earnings plunged, and it sees demand in its main
markets remaining depressed for the rest of the year.
[ID:nLI726745]
 But copper, used in construction and power, rose after 
stocks of the metal recorded their first big fall since October.
 Copper for delivery in three months on the London Metal
Exchange firmed to $3,219.50 a tonne from $3,185 a tonne on
Tuesday, when it fell to its lowest since early February. 
 Prices of most commodities have slumped since the third
quarter of last year, with copper losing about 60 percent since
a record-high $8,940 a tonne in July.
 The Reuters-Jefferies CRB index .CRB, which tracks
commodity futures across 19 markets, fell 4.6 percent to its
lowest level since June 2002 on Tuesday. [ID:nN17387230]
 But investors seeing the bottom of the collapse in commodity
prices drawing near, should hang fire and remain focused on
equities, Goldman Sachs GS.N analysts said in a research note.
 The investment bank said rising forward price curves for
commodities, also known as contango markets, meant speculating
in the asset class was still risky and investors would be better
placed putting their money in mining and energy equities.
 (Additional reporting by Frank Tang in New York, Jan Harvey,
Rebekah Curtis and Chris Baldwin in London; Editing by Peter
Blackburn)

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