Gold

Gold prices surged by a quarter in 2005, when it hit its highest level in nearly 25 years of $540.90 an ounce in December, after spending the first eight months in a $410—$460 range. Gold has been on a steady upward march since April 2001, when an ounce of the yellow metal could be bought for $255.95. Factors which have pushed up the price of gold include; rising inflation, low short-term interest rates and demand from the Asia and the Middle East.

Inflation erodes the buying power of paper money. When the value of paper money declines, people bid up the price of gold, which has served as the currency of last resort for centuries.

The Federal Reserve has raised its key short-term fed funds rate to four per cent from one per cent since mid-2004. That’s still less that the inflation rate, meaning the real fed funds rate – that is, after inflation – is negative. Gold always rises in a country that has negative real rates, says Frank Holmes, chief investment officer of the US Global Investors. Central banks keep interest rates below the inflation rate to speed up the economy – and that can lead to inflation.

Demand has risen from countries in Asia and the Middle East. As China, India and other Asian economies expand, so does demand for gold, which is a traditional investment there. In addition, some central banks – notably Russia – may be boosting their gold reserves.

Leading investment banks and research firms said gold had potential to rise beyond recent highs in 2006. Rising oil prices fuelled worries about the economic growth and inflation, while geopolitics and unstable currency markets helped provide a perfect launching pad for gold’s ascent. Strong fundamentals also aided the metal, with physical demand rising in key markets and supply seen stagnating in the longer term.

Gold output in South Africa, the world’s top producer, fell 15.4 per cent in the third quarter to 72.4 tons from the same period last year because of restructuring and shaft closures.

Gold’s tight inverse relationship with the dollar weakened in the last quarter of 2005, when it extended gains despite a rise in the dollar. Speculation that some central banks might turn out to be buyers in a bid to reduce their heavy dependence on the dollar in their reserves gave a further boost to the market.

Oil

OPEC oil output fell in December to its lowest level since May as Saudi Arabia cut output and Iraqi exports slumped. Output from the Organization of the Petroleum Exporting Countries fell 180,000 barrel per day to 29.81 million bpd. Saudi Arabia cut production by 150,000 bpd to around 9.4 million bpd.

Iraq’s exports fell to their lowest level since the 2003 war at 1.08 million bpd, down from 1.21 million bpd in November. Bad weather, technical problems and pipeline sabotage combined to reduce Iraq’s shipments.

Production from the 10 Opec members not bound by quotas, excluding Iraq, fell 50,000 bpd to 28.23 million bpd as increased output from the United Arab Emirates partially compensated for the fall in Saudi output. Output from the Opec-10 was 230,000 bpd above the group’s quota target of 28 million bpd.

The US Energy Information agency said, as of December 2005, Iraqi net oil production was averaging a modest 1.9 million barrels per day. This is well below production levels of an estimated 2.3 million bpd in January 2003 just before the US led military operation in Iraq.

Despite its attractive potential for development — only 17 of the 80 fields discovered in Iraq have been developed — a number of reasons have been behind Iraq’s slowness to turn around its post-war oil industry. Political instability, violence, and the sabotage of oil industry pipelines and infrastructure have been the main factors. The 2003 war itself did little damage to the infrastructure, but looting and sabotage in the aftermath accounted for 80 per cent of the destruction.

Between April 2003 and January 5, 2006 there were 290 recorded attacks on Iraq’s hydrocarbon and energy infrastructure including the nation’s 4,350-mile-long pipeline system and 11,000-mile-long power grid according to the US-based Institute for the analysis of Global Security (IAGS), an independent organization that monitors energy and security issues.

Metals

THREE-month aluminium rose 1.2 per cent to $2310.5 a ton on January 4, a new 17-year high with the Chinese prices expected to remain strong due to increasing energy costs.

On January 11, China reported a rise of 27.9 per cent in crude steel production last year to 348 million tons. It is targeting an increase of 27.7 per cent in steel capacity to 600 million tons per annum over the next few years.

Aluminium rose one per cent to $2,368.5 a ton, a new 17-year high, and dealers said a short-term target of $2,400 was achievable given production constraints due to high energy prices and raw materials costs.

Lead rose three per cent to $1,160.5 a ton while zinc increased 2.4 per cent to a record $2,022 a ton, retreating to $2,102 on news that three production lines at the Zhuzhou smelter in China has been halted following toxic spill.

Copper traded at $4,577 a ton after hitting a record $4,612 during January 10, as Chinese buyers sought supplies before the week-long New Year holiday. Chinese copper consumption is expected to rise 8.3 per cent this year as it improves its power network.

Gold rose $3 to $545.10 a troy ounce. Traders highlighted strong buying interest from the Japanese public, with investors diversifying into bullion after booking profits from last year’s stock market rally. Retail counters at the big bullion trading houses have reported busy trading since the start of the year.

The Barclays Capital said platinum was its preferred precious metal for 2006 based on a combination of resilient fund interest and robust consumer demand. Platinum traded almost unchanged at $1,010 a troy ounce, close to a 26-year high. Demand from Chinese carmakers looks set to increase after the Changan Auto, China’s fourth largest car maker and a partner to Ford, said it planned to invest $372 million to develop low emission cars.

Silver firmed five cents to $8.95 a troy ounce as the New York Mercantile Exchange said increased margins for its silver futures contract will take effect. It could lead to liquidation of long positions.