Plunging gold and oil prices mean one thing: Welcome to the commodities bear market of 2008!

Baltimore — (TFN): The day was off to a raucus start: Crude oil fell as much as 2 percent to $112.75 a barrel. Platinum plummeted $125 to $1,365 an ounce, its gravest intraday loss since Sept. 25, 2001. And gold fell as much as 4.2 percent to $772.98 an ounce.

That’s a loss of $260 per ounce and 26% off the March peak for gold.

Commodities overall have now lost 21 percent in value from the record they posted on July 3.

That means one thing: Welcome to the commodities bear market of 2008! Soon, you might kiss goodbye to inflation, to the American export boom, and high-priced gasoline.

But let’s not get ahead of ourselves…

The pundits who credited inherent economic weakness in the U.S. economy for the rise in gold prices are now blaming the North American and Western European economic malaise for its decline. It must be great to have a one-size-fits all explanation.

The long-term effect of this rapid decline in an asset that has been sold as a hedge against devaluation in currencies and inflation is yet to be seen. So far, we’ve seen funds liquidate speculative positions and wholesale buyers defer purchase decisions. But what will this plunge do to the hoarding instincts of the gold hedger, especially in emerging markets. Gold supposedly is “real money”. But like any fiat currency out in the real world, it apparently has some “real inflation” to deal with. Which reduces the “auri sacra fames” — depending on whom you ask, the “holy lust” or “accursed hunger” for gold.

Due to the far lower income levels, that “hard money inflation” hits especially hard in emerging markets like China.

Consider this: Just two weeks ago, the Chinese papers were polishing their collective nails on their lapels reporting that “the per-capita disposable income for Chinese urbanites increased 14.4 percent to 8,065 yuan ($1,182) in the first six months over the same period in 2007.”

This is the emerging Chinese middle class, mind you. The ones with money. The ones most likely to buy gold as an investment. Now look at the recent price development from their perspective. These people just watched their $1,033 ounce of gold — representing their annual disposable income — by $250… three months worth of work.

I am almost certain that the bragging rights of “having bought gold below $1,000″ (as pronounced by Howard Ruff earlier this month) will do preciously little to their sense of self woth… or indeed their net worth. Nor will it foster confidence in further buys. After all, gold’s drop makes even the renminbi — China’s PPI rose by a 12-year peak of 10.1 percent in July — look like Maine coast granite by comparison.

What’s ahead, particularly for China? Glad you asked. TFN’s Laura Cadden just put that very same question to me in this weekend’s Smart Trading. And I sure gave her an earful. If you’d like to listen in, just follow this link!

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Source: Hard Money Inflation: Oil and Gold Continue to Plunge