Commodities take a hit

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NEW YORK (CNNMoney.com) -- It's not just stocks suffering the pain of the global financial mayhem. Commodities like corn, coffee and oil are also taking a big hit.

The weakening world economy - and the stronger dollar - are causing many investors to bail out of commodities.

The S&P GSCI Index - which tracks the prices of two dozen raw materials including wheat, corn, sugar, copper and lead - has dropped nearly 29% from the start of the month.

The credit crisis has left portfolio managers strapped for cash. "Sell now, ask questions later has been the motto of most hedge fund managers," said Peter Grandich, the chief commentator for Agoracom.com, an online investor relations firm.

Commodity markets have seen "wholesale liquidation of anything and everything people can get a hold of, including the kitchen sink," said Grandich.

While prices have fallen steeply in recent weeks as fears of a global recession have intensified, the selloff started much earlier.

"The credit crisis just accelerated the sell off and made it go faster," said Grandich. Prices were "already declining before hedge funds had to start selling because of the credit crisis," he said.

Commodities also tend to move in opposite direction to the dollar, which has been on a tear of late as investors worry about a deep global recession.

The greenback was near a 2-year high against the euro Friday. While the "weak dollar caused a lot of buying of commodities for the past year," the surge in the value of the dollar has led to a selloff of those same commodities, said David Hightower, editor of the Hightower Report.

Commodities were also taking a hit from worries over falling demand, which has pressured oil prices. When the economy slows, consumers and manufactures use fewer raw materials.

"Just as in oil, we have demand destruction, demand erosion," said Hightower. However, measuring the level "is difficult depending on the commodities," he said. "The majority is anticipatory [and] that is what creates the most volatility," added Hightower.

Non-precious metals used in industry, like aluminum and copper, have fallen more quickly than prices of agricultural commodities.

"People still have to eat, but they don't necessarily have to build a new building," said Grandich.

Aluminum was trading at a 3-year low at 94.25 cents per pound. The last time the metal traded at these levels was the end of November 2005, when aluminum cost 94.20 cents a pound.

Copper, often used as a gauge for the broader health of the economy because of its diversified uses, settled at $3,986 a metric ton for the three-month contract. That's a far cry from July's record high of $8,940 a ton.

Meanwhile, coffee futures were trading at $1.09 a pound - the lowest price in 14 months. The last time coffee was at this level was Aug. 3, 2007. December corn futures were still hovering around a 10-month low at $3.73 a bushel on the Chicago Board of Trade and November soybean futures were trading at $8.64 a bushel on the CBOT.

Oil dipped to its lowest price in 17 months Friday, touching $62.85 a barrel, marking a 56% drop from oil's record high of $147.27 in mid-July.

Gold was trading at $730 an ounce Friday, which although up on the day, was significantly off recent highs. Gold cost $983.90 an ounce in mid-July and was over $1,030 an ounce back in mid-March. Gold trades with unique conditions, as some investors see gold as a safe haven during times of financial turmoil.