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G. Chandrashekhar

Mumbai, Oct. 6

SPECULATORS love uncertain conditions. In the wake of the US hurricane damage, speculators in the commodity markets appear to be positioning primarily for heightened inflation risk via heavy long exposure to gold.

Funds have also been buyers of agricultural commodities on reduced crop expectations as a result of the bad weather in hurricane-affected crop-producing areas.

Uncertainty over growth prospects appears to be inducing caution over exposure levels to industrial metals.

Most surprising, however, is the aggressive shorting of the energy sector by commodity speculators. Experts at Barclays Capital Research cautioned that it looked risky, given the massive damage to US energy facilities.

Interestingly, over the past two years, the size of the US commodity futures markets in quantity terms (open interest measured in number of lots) has nearly doubled.

In value terms too, it has more than doubled, analysis has shown.

When the notional value of the open interest is calculated (using prevailing price levels in different commodity sectors), there has been a massive increase in the notional value from $129 billion in July 2003 to $350 billion currently, experts pointed out.

Precious metals As net non-commercial positions continue to build in the precious metals complex, the risk of near-term price corrections increases, particularly in gold and platinum.

From the level of $469 an ounce on September 30, gold eased back. It was trading at $466/oz in the early session on Thursday. The expectation of a near-term upside risk for the dollar will also be potentially negative for gold.

However, the persistent strength in oil prices has led to increased inflationary risks, and this, together with an uncertain economic outlook after the hurricanes, has created an environment that is positive for gold, the experts added.

In the current quarter, the yellow metal is forecast to average $460/oz, up

from $440/oz in the previous quarter. It is expected that fund interest

into dips would support prices above $ 460/oz in the near term; and profit-taking might push prices lower in the medium term.

As for base metals, the underlying support appears strong due to tight supply. Price volatility is expected to stay high; but any correction could only be short-lived, as market participants (both consumers and investors) are looking for opportunities to buy.

History suggests that natural disasters tend to boost metal consumption

because of repairs and reconstruction activity. This time, following the

hurricanes in the US, demand for metals would rise at a time when global growth is already robust, while metals supply is lagging behind and inventories are low.

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