October 27, 2003	Monday	Sha’aban 30, 1424

Commodity prices hit record highs last week as investors seeking to diversify from equities and bonds found appeal in the sector. Commodity prices across-the-board have taken off this year on the back of a world economic recovery. But higher raw materials costs could trigger an increase in inflation.

The Goldman Sachs Commodity Index, which is the most widely traded index of its kind, attracting up to $15 billion of investment, is at its highest levels since it hit a lifetime peak in early February. The GSCI at the time was driven by oil prices rising sharply in the lead up to the Iraq war.

Heather Shelmilt, head of commodity index marketing at Goldman Sachs, said the GSCI is up 20 per cent so far this year, with October accounting for about 10 per cent of that gain, which was one of the sharpest rises in 2003.

The Baltic Dry Index, which is the benchmark for freight rates on vessels carrying bulk goods, including coal, iron ore and grains, has quadrupled in the past year, and risen by more than 50 per cent in the past month alone.

China has been the key to reflation as soaring imports to supply its booming economy have pushed commodity and shipping prices, a trend that has been in place since December 2001, when China joined the World Trade Organization.

Gold

Gold fell on October 17, to hit its lowest level in seven weeks before re-stabilizing, with currency fluctuations still the major determinant of price direction in a subdued market.

Bullion dipped to $366.10, its lowest since August 27, as selling briefly shoved the market outside this week’s small $369-376 range. Data from the United States, which showed consumer sentiment rose so far in October, caused the market to accelerate its modest down trend, although a subsequent weakening in the dollar as financial markets then shrugged off the news helped stem the wave of selling.

Demand is expected to pick up as the festival of Diwali, Eid-ul-Fitr and Christmas approaches. European traders said that with spot gold prices now some $25 away from September’s 7-year high at $393.30, buyers could be tempted back to the market to take advantage in case the rally re-ignited.

Gold has seen subdued trading since a sharp fall two weeks ago, when funds liquidated some of their massive long position. The market has since been searching for direction, content to ebb and flow in line with currency movements.

Platinum, which took centre stage in precious metals last week after hitting fresh 23-year peaks at $733, was firmer in quiet activity. Spot prices were modestly up at $724/729, compared with New York’s last quoted level on October 16, at $722/$727.

Base Metals

Base metal prices have risen in recent days. Metals such as copper had seen a rise of more than 5 per cent, with nickel rising to 13-year high due to the continued weakness of the US dollar and concern about supply and demand fundamentals. By October 10, three-month copper prices increased to $1879 per tonne on the London Metal Exchange against $1833 a week earlier.

Three-month prices of aluminium rose to $1486 per tonne from $1433, nickel up to $10810 per tonne from $10453, zinc climbing to $904 per tonne from $855, and tin boosting to $5220 per tonne from $5100.

Copper prices leapt to another three-year high on news that Noranda, the Canadian miner, planned to cut production at its Horne copper smelter. The three-month copper price ended $45 higher at $1,964 a tonne on October 15, at the end of open outcry trading on the London Metal Exchange. This was its highest close since September 2000. Three-month LME tin prices ended $50 higher at $5,330 a tonne, their highest close since November 2000. Aluminium, nickel, lead and zinc prices all partially regained some of their losses from the previous session.

Gold prices were weaker following a rise in the US dollar. Gold was quoted at $373.65/$374.35 a troy ounce on October 15, compared with a day earlier quote in New York of $375.00/$375.75.

The London afternoon gold fix was $373.50.

Indian with its huge stockpile of aluminium and alumina output, is poised to play a key role in the export market in the long term as capacity growth outstrips domestic demand.