Commodities quickly return to normal: Up

May 3, 2011, 12:13 AM UTC

FORTUNE – Prices for gold, silver, and other commodities might have tumbled Monday, but don’t bet that investors are feeling much safer now that Osama bin Laden has been killed.

For months, the value of precious metals and oil has surged partly on worries over everything from America’s growing deficit to ongoing unrest in the Middle East. Certainly these problems won’t be going away any time soon, even if oil prices fell by as much as 2.7% (the most in two weeks) to $110.83 a barrel, while gold dropped to nearly $1,540 an ounce from its fresh record high of $1.575.79, and silver plunged 10%. Prices of all three commodities erased much of those losses by the end of the day Monday.

Any downward pressure on oil and precious metals will likely will be short-lived. In general, investors turn to gold and silver as safe-haven investments away from U.S. Treasuries and other securities. Prices for the commodities have been rallying as policymakers on Capitol Hill wrangle over huge fiscal deficit problems.

At least as a knee-jerk reaction, it might make sense for investors to trade on expectations that the death of Osama bin Laden will eventually reduce military spending by the U.S. Department of Defense. But that argument will probably wane, as key drivers that have supported prices are unlikely to fundamentally change.

So far this year, oil markets have rallied as civil war in Libya and anti-government protests in the Gulf broke out. And while ultra-loose monetary policy has also helped send oil and gold prices higher, it’s unlikely that bin Laden’s death will change the direction of interest rates any time soon. Last month, the Fed announced it planned to keep rates low for an extended period to support the economic recovery.

To be sure, the death of one of the world’s most notorious terrorist group leaders clearly sends a signal to other like-minded groups, but it’s not as if the world is all safe and sound. Already, some analysts are expecting bin Laden’s death to provoke unrest in key oil exporting nations such as Saudi Arabia.

“While US equity future are trading higher, security threats may actually create an increase in global market uncertainty,” according to a UBS report Monday.

Vedant Mimani, lead portfolio manager of Ayant Capital, says the fall in oil and precious metals is merely a “short-term emotional one.” Europe’s huge debt problems, which have unnerved investors and driven many to invest more in precious metals, is likely to persist for a while.

“The real driver behind gold is supply,” says Mimani, who was buying up gold at a discount when markets opened Monday morning. His firm manages $21 million spanning two funds that include Indian equities and precious metals.

Turns out that was a wise trade. Gold has more than recovered Monday, rising to a record $1,577.40 an ounce. So much for the party.

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