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Commodities rally past stocks

| Wednesday, Nov. 10, 2010

NEW YORK -- Stocks and government bonds fell Tuesday as commodities rallied to two-year highs.

Silver, soybeans and copper jumped to levels last seen in October 2008 as investors moved money into hard assets in anticipation that a far-reaching economic stimulus plan announced by the Federal Reserve last week will continue to weaken the dollar. Investors are expecting that commodities will hold their value even if the dollar falls.

The Fed plans to buy $600 billion in U.S. government bonds over the next six months in an effort to push interest rates even lower and encourage borrowing and spending. It's a tactic called quantitative easing, one that the Fed used successfully in 2008 to restore confidence in financial markets at the height of the credit crisis.

"The market is still being driven by the Fed's actions and it will be for a while," Dirk van Dijk, senior equity strategist at Zacks.com.

Treasury prices fell despite a strong auction of 10-year notes. Investors are concerned that demand may be weak for 30-year bonds in an auction today. The price of the 30-year bond was down sharply, losing about two full points, or $2 per $100 in face value. Its yield rose to 4.23 percent, the highest level since June 10.

The 30-year bond wasn't one of the maturities being heavily targeted by the Fed's purchasing program, and its long maturity makes it more sensitive to inflation than shorter-term notes.

Many investors worry that the Fed's bond-buying program could lead to a jump in inflation down the line, which would erode the value of all bonds since their fixed payouts would become worth less over time. With the Fed now focused on encouraging some inflation, "it might be hard for investors to convince themselves to buy" at today's auction, said John Briggs, a fixed income analyst at RBS.

The dollar has been falling against other currencies in anticipation of the Fed's stimulus program, but it gained 0.9 percent against an index of other currencies Tuesday as new troubles emerged in Ireland, one of the weaker countries that use the euro, Europe's shared currency.

Investors are concerned that Ireland's government will not be able to pass additional spending cuts and will have to ask for financial assistance.

The Dow Jones industrial average fell 60.09, or 0.5 percent, to 11,346.75. The broader Standard & Poor's 500 index fell 9.85, or 0.8 percent, to 1,213.40, while the technology-focused Nasdaq composite index fell 17.07, or 0.7 percent, to 2,562.98.

Every industry group within the S&P 500 fell. Financial shares, which fell 2.2 percent, were the worst performing industry group.

Gold settled at $1.410.10 an ounce, up $6.90. The precious metal is hovering near record levels in dollar terms but is still well below its peak in the early 1980s after accounting for inflation.

Silver rose, jumping 5.4 percent to settle at $28.906 an ounce.

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