Commodities surge higher

Gold
Gold has lifted to test $880.20 a troy ounce in US trading, helped by new investor inflows at the start of the year, rising oil prices and concerns over the outlook for the dollar. Gold has also found support from the increase in geopolitical tensions after US naval ships in the Strait of Hormuz came close to firing on five Iranian boats, which reportedly threatened them at the weekend.

In China, trading in gold futures is due to begin on the Shanghai Futures Exchange on Wednesday. “This is the biggest event in the market since the launch of the gold exchange traded funds as a [Shanghai] gold future will allow leveraged investment from Chinese investors and speculators,” said John Reade of UBS. “We could see a few million ounces of gold bought via futures over the course of the next few months, but it is entirely possible that interest will exceed this.”

Investment demand for gold has been rising steadily with holdings in streetTRACKS, the largest gold exchange traded fund, increasing to a record high of 639.35 tonnes on Monday.But analysts remain concerned that price volatility will have a negative effect on jewellery demand.

“There is a growing dichotomy in the gold market between investment demand, which is robust, and consumer demand for gold, which is contracting in most regions,” said James Steel, precious metals analyst at HSBC.

Oil

Crude oil prices rose on talk of an attack on oil facilities, which are being threatened by militants in Nigeria, the world’s eighth largest crude exporter. After dropping by $2.82 in the previous session, Nymex February West Texas Intermediate rebounded $1.24 to $96.33 a barrel. ICE February Brent added $1.15 at $95.54 a barrel.

Metals

Copper jumped 5.8 per cent to $7,310 a tonne, helped by falling inventories in China, which is leading to supply concerns and market speculation that imports will have to increase to meet strong domestic demand. Other base metals followed copper higher. Zinc gained 3.6 per cent to $2,580 a tonne on talk that China’s zinc production declined in the second half of 2007. Nickel rose 2.6 per cent to $28,950 a tonne while lead added 3.1 per cent at $2,670 a tonne. Dealers said some players had bought in anticipation of prices rallying as a result of the commodity index re-weightings that take place this week. Dealers said that in the absence of a clearer improvement in fundamentals, base metals could run into profit taking once reweighting of the indexes is complete.

Food Groups

Coffee prices were little moved by forecasts for a sharp increase in the Brazilian coffee harvest in 2008-09. Conab, the Brazilian government agency, is forecasting a crop of 41.3m-44.2m 60kg bags, up from a harvest of 33.74m bags in 2007-08. Conab’s forecasts are more conservative than market estimates, which range from 44m to 50m bags. Liffe March robusta coffee rose $15 to $1,966 a tonne.

Huge growth in investor interest in commodities was underlined by a record breaking performance for trading volumes in robusta coffee, cocoa, sugar, feed wheat, milling wheat and rapeseed on Liffe last year. Liffe said that the volume of all commodity products (futures and options) rose 30 per cent to a record 12.78m in 2007.

The Financial Times

With all this demand going on, hard to see commodity currencies like the NZD and the AUD taking a look lower for very long, if at all. -KT