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War threat boosts oil, metals

By Peter V O'Brien

Friday 31st January 2003

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January was a weak month for sharemarkets but good for producers of, and traders in, metals and oil.

Metal producers, which sell output on contracted prices for future delivery, need time to benefit from current developments.

They will do well eventually if prices are maintained in the medium to long term. The possibility of a US attack on Iraq and the political situation in Venezuela were the main reasons for the rise in oil prices.

Rising metal prices seemed to result from a combination of a relatively weak US dollar (also linked to the US-Iraq situation) and the possibility of stockpiling, again related to war fears.

Spot and futures prices for metals traded on the London Metals Exchange (LME) and in other markets are expressed in US dollars.

The relationship of the US dollar to other currencies and speculation about future demand are elements of the traders' complicated pricing equations.

Gold prices are directly related to actual or perceived political crises, although there is little logic in these days of de-monetised gold to buy the stuff at ever-increasing prices.

Logic is thrown aside when people cling to outmoded concepts, so the gold price increased substantially this month and since the end of 2001, as shown in the table.

Price comparisons for other commodities are also in the table. There were solid increases in January and since the end of 2001, with the exception of the 13-month figure for lead.

Current oil pricing is based on the propositions the US is not self-sufficient and Iraq is a large supplier to world demand and on the situation in Venezuela.

Opec's reaction to recent prices and its members' views in relation to the expected US-Iraq confrontation and other Middle East problems is a key to future oil prices.

New Zealand investors (or speculators) who punted on depressed metal prices early last year did well in two ways, presuming they still hold positions. LME prices increased and the New Zealand dollar had good appreciation against the US currency.

Commodity trading is a game with three players: producers, traders and end-users. The last must buy stock requirements eventually, whether directly from producers at contracted prices or on the open market.

Contract prices and hedging against the international base price and exchange rate movements may protect producers and end-users. Traders can also hedge, whether against currencies or put and call options and other derivatives.

Spot price markets are another tool for producer and end-user protection. That requires a sophisticated approach to commodities.

A New Zealand manufacturer of products with a high content of imported metal, for example, would be foolish to play the spot market or other avenues of commodity speculation. They are in business to produce goods, not to speculate in currencies, derivatives or international political/economic developments.

Traders and speculators risk losing a lot in the unlikely event the US showdown with Iraq evaporates, leading to a fall in possible stockpiling in the US General Services Administration and other organisations, or if general international economic conditions soften and there are solid currency adjustments.

The outcome will be considered later this year in annual commodities' survey.

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