The Golden Hedge

Aside for being a natural hedge for inflation and currency devaluation, I view physical gold as the ultimate form of wealth insurance. It is very liquid and widely recognized by almost all countries. As an investment vehicle, it's a great diversifier. Gold prices soar when everything slumps.

There is this industry belief that no asset goes to the moon without a few big declines to scare everyone.

The precious metal is on an uptrend since 2001. It trotted from US$250 per ounce to US$450 per ounce in 2005. It doubled in just over two years to breach US$1,000-per-ounce level.

As seen from the chart, there is a short-term decline in the price of gold. And the price could fall even farther and still be in "bull mode".

Aluminum prices hit all-time high

Aluminum hit a succession of all-time price highs this month despite a weak demand. A commodity broker pointed out: "When you hear producers in China are shutting production because demand is weak, that's normally bearish, yet the market saw insane price moves." On July 7, the price climbed to a record peak of US$3,327 per metric ton in the London Metal Exchange (LME), breaking previous high of US$3,260 per metric ton that was recorded about 10 years ago. Then on July 10, it soared to a fresh all-time high at US$3,380 per metric ton. A London-based trader said the July 7 price move must not have been due to Chinese power / production issues, but the move was due to a market exercise. Download podcast: Power shortages drive aluminum price rises

High trending steel

Almost all finished steel products are currently priced above US$1,000 per metric ton, ex-works basis. Since November 2007, the world export price for hot-rolled band has risen from about US$600 per metric ton to US$1,024 per metrci ton in May 2008 – an increase of more than US$400 per metric ton, or about 71%. Hence, consumers are asking what would be the justification for this current "steelflation".

For sure, steel producers will be citing the continuous price hikes of raw materials that are affecting global businesses. According to World Cost Curve results conducted by Platts, the average cost to produce hot-rolled band including overhead has risen from US$483 per metric ton in the fourth quarter last year to US$673 per metric ton this year.

For instance, in the U.S. market, a semi-finished slab is not cheap as it is priced at about US$850 per short ton. Its conversion from slab to coil is estimated at US$60 to US$70 per short ton. Tolling fee is about US$100 per short ton. That variables alone, excluding mark-ups, have totaled more than a thousand dollar per metric ton for a finished coil product. It was observed that steel mills have announced spot-market increases on an almost weekly basis – many of those well in excess of US$50 per short ton at a time. The same holds in Europe. Here are some updates on what is happening in the steel market. The hot-rolled coil (HRC) in the US market is up 88%, from US$565 per short ton, ex-works Indiana in the fourth quarter of 2007 to nearly US$1,060 per short ton in June 2008. Over the same period, the hot-rolled coil in Europe surged 78%, or Є225/metric ton, ex-works Ruhr to Є705 per metric ton.

Cold-rolled coil in the US market is up 79% since December 2007 to US$1,130 per short ton, ex-works Indiana from US$635 per short ton. In Europe, the cold-rooled coil is up to Є770 per metric ton, ex-works Ruhr in early June 2008 from Є550 per metric ton since December 2008. The Platts Eastern Mediterranean rebar export price was $630 per metric ton, free-on-board Turkey in December 2007, but it has almost doubled to US$1,200 per metric ton recently. In the U.S. market, domestic rebar is up to roughly US$900 per short ton, ex-works US Southeast mill from about US$600 per short ton in December last year. In Northwest Europe, the Platts price assessment of rebar has swelled nearly Є340 per metric ton to Є780 per metric ton since December 2008. With regard to imported plates in Europe, their price has risen Є830 per metric ton in early June 2008 from Є655 per metric to, including cost of insurance and freight, Antwerp in December 2007. Domestic plates hasvealso gained nearly 27%, increasing to Є845 per metric ton from Є670 per metric ton over the same time period. On the other hand, domestic plate prices in the U.S. increased 54% since December 2007, to about US$1,240 per short ton, ex-works Southeast U.S. mill, from US$805 per short ton. Imported plates have gained 47% over the same timeframe to US$1,130 per short ton, including cost of insurance and freight, Houston from US$770 per short ton in December 2007. Scrap prices have surged too. According to Platts, the A3 grade price is up 99% to US$680 per metric ton, freight-on-board, Black Sea from US$342.50 per metric ton in December 2007.

Diamonds may not last forever

The market for diamonds is showing signs of cracking as medium-term supply growth is just over 1% per year. Demand, on the other hand, has been growing about 5%, which is causing prices to jump over 30% since 2003.

Although, there are supply growths seen in Canadian and African mine, but their production is merely offsetting the decline in Australia.

About 50% of all gem diamonds and industrial-grade diamonds are being gobbled up by the United States. However, falling confidence in the American economy has already affected the market for the diamond industry.

De Beers, the world's largest diamond producer, is coping up with rising production costs and a weakening business outlook not just in the United States, but across the globe as well. The impending crisis has also caused wobbles to the world's number two producer, Rio Tinto.

Analysts are saying that there will be some cushioning to take place in the diamong industry. The industry is so concentrated, and therefore, it can exert market power.

Precious metal madness

Gold is edging closer to the US$1,000-per-ounce psychological mark, hitting its fourth straight record high at US$983.90 an ounce yesterday (Mar. 3). To date, the precious metal has gained around 18% as more and more investors are shifting their funds to safer haven assets on expectations of more interest rate cuts in the US. Its inflation-adjusted all-time high stood at US$2,119 per ounce at 2007 price, as per some analysts.

On the other, silver rose the US$20-per-ounce pivotal level. This is the 27th year high, since November 1980, of the so-called “poor man's gold”.

Meanwhile, spot platinum average price firmed to US$2,171.50 per ounce. More popularly known as “white gold” in the jewellery industry, platinum had reached a record high of US$2,192 an ounce on Feb. 22.

Another precious metal palladium, said to be the hardest metal on earth, rose to as high as US$583 per ounce, still within the range of last week's 6-1/2-year high.

The Futures for Steel

Just recently, another futures contract for steel was launched this time by the London Metals Exchange (LME). The 131-year-old LME, the traditional home for base metal trading, introduced its first contract for steel on Jan. 25. Initially, the trading is being done via electronic deals. Open-outcry trading is scheduled to commence on Apr. 28.

But prior to that, the Dubai Gold and Commodities Exchange (DGCX), the first international commodities derivatives exchange in the Middle East, introduced its first steel futures contract three months ahead of LME in Oct. 2007. With the launching of its steel reinforced bar (rebar) futures contract, DGCX is poised to win the race among commodity exchanges for an internationally tradable steel futures contract.

Indeed, commodities exchanges around the world are racing to launch futures contracts for the US$500 billion steel industry, which lacks a global benchmark for pricing.

During the first day of trade at LME, steel volume soared to about US$1-million in value. The Far East contract for steel futures stood at US$755 per ton, while the Mediterranean contract stood at US$785 per ton on the opening day.

The Middle East is fast-becoming a major steel consumer, now with over 50-million metric tonnes per annum (mmtpa) consumed. Nonetheless, China and India still dominate the market's demand-side.

There are also exchanges in India and China that are offering steel futures; however, the prices discovered in them are confined to the respective markets and only domestic firms are allowed to trade. Not unlike DGCX, which is open to all international companies.

The New York Mercantile Exchange (NYMEX), the largest physical commodity exchange in the world, and Shanghai Futures Exchange of China are also working on the launch of steel futures contracts this year.

Here are some notes on some of the world's major exchanges’ latest plans about steel futures:

Dubai Gold and Commodities Exchange (DGCX)

• Each contract will be for 10 tonnes of grade W460 rebar of 12 metres and will allow for physical delivery at DGCX-approved delivery points in Dubai, which can be used as optional warehouses.

• The exchange will list three delivery months — initially December 2007, January 2008 and February 2008. Additonal delivery months and a weekly delivery cycle will be added as market liquidity grows.

• The steel contract is the first of four contracts targeted at the steel supply chain that the exchange plans to issue. The three others are for stainless steel, flat products and freight.

London Metals Exchange (LME)

• The LME had launched two steel futures contracts. But the contracts, which cover steel billet for delivery in the Mediterranean and Far East, will be tradeable on electronic platform. Open outcry trade will start on Apr. 28.

• Contracts out to 15 months will be available and the lot size will be 80 tonnes, loose or in bundles of seven to nine tonnes in billets, which are semi-finished products.

• The initial delivery location for the Mediterranean contract will be at Istanbul in Turkey, and for the Far East contract at South Korea. Lot sizes for both contracts will be 65 tonnes.

New York Mercantile Exchange (NYMEX)

• NYMEX will launch a steel futures contract later this year based on the SteelBenchmarker index of World Steel Dynamics,Inc.

• The expected contract will be USA hot-rolled band steel futures and will be cleared on the NYMEX ClearPort system.

• The contract will be 20 short tons with a minimum price fluctuation of 50 cents per short ton and will be listed for 18 consecutive months.

• Final settlement day will be the fourth Wednesday of the current contract month.

Shanghai Futures Exchange

• The exchange is planning to introduce rebar and steel wire futures sometime on the next two years, while awaiting for significant support from China’s steel industry.

Philippine mining sector grew 33% in 2007

When the Philippine mining industry opened its portals to full foreign ownership in 2004, some of the world's biggest mining firms have started to explore the estimated Php1-trillion of untapped mineral resources of the country.

As a result, the US$1-billion accumulated output has now grown to about US$2.3-billion after three years. In 2007, the output value of Philippine mineral production rose to 33% or Php95.5-billion (about US$2.3-billion) from about Php72-billion in 2006, according to Mines and Geosciences Bureau.

Gold accounted for over half of the industry share with about Php40.88-billion, while nonmetallic mineral production had garnered around Php17-billion. Other metallic elements like silver, copper, nickel, etc. accounted for the rest of the figures.

Investment interest is picking up as world metal prices have risen due to higher demand from China and the power crisis in South Africa that constrained global market supply.

Platinum soared anew at US$2,124 per ounce

Another record high was registered by platinum due to the worsening power crisis in South Africa which is disrupting mining activities. Spot platinum prices hit a high of US$2,124 an ounce on Feb. 18, up from US$2,105 per ounce.

More than 60% of the world's platinum output is used as catalyst in vehicles, helping to clean exhaust fumes, while nearly 25% goes to jewellery making.

The two biggest producers of the precious metal, Anglo Platinum and Impala Platinum, have forecasted a very tight market conditions this year.

Gold record at US$923 per ounce

Gold hit another new all-time high at US$ 923 per ounce on Januray 25, after power cuts in South Africa closed mines and fueled supply fears.

The suspension of production at some of the world's biggest gold mines in South Africa had exacerbated the gold rally, after the country's state power supplier, Eskom, declared a four-week power supply shortage.

The new record price had just surpassed the previous records set within the week. The last time gold had set a new high was on January 21, 1980 where it reached US$875 per ounce. Then, the first time the 1980 record was broken was on January 8 this year where gold climbed to US$899 per ounce due to robust buying by fund managers, declining value of the greenback, and surging crude oil prices.

Gold's record position was mirrored by other precious metals, with platinum also setting a fresh all-time high at US$1,587 an ounce, and silver touched a 27-year high of US$16.58 per ounce during the week.

Financial market's reaction to the murder of Benazir Bhutto

The assassination of Pakistani opposition leader and former prime minister Benazir Bhutto sparked fear of global unrest. Her murder further highlights the issue of terrorism. Such gloomy scenario had trickled down to the financial markets and triggered a classical flight-to-safety asset flows.

On Dec. 27, the day of the assassination, the Dow Jones Industrial Average (DJIA) sank 192.08 points, or 1.42%, to close at 13,359.61 points. The S&P-500 slid 21.39 points, or 1.43%, to 1,476.27 points, while the Nasdaq tumbled 47.62 points, or 1.75%, to 2,676.79 points.

Meanwhile, the price of gold hit a one-month peak as traders reacted to the event. The precious metal, widely regarded as a safe investment in times of geopolitical uncertainty, climbed to US$830.41 per ounce from about US$825 dollars per ounce on the London Bullion Market before news of Bhutto's death.

Consequently, the Swiss franc, the currency which has a direct correlation to gold, had ended higher against both the US dollar and the euro. Coupled with weak economic data released at the same time as Bhutto's death, the greenback declined heavily by 0.6% at CHF1.1428 level. On the other hand, the euro fell to CHF1.6665, or about 0.16% lower than its level before the tragic incident took place.

In the bond market, the 10-year US treasury notes, which prices had already been up on the day after weaker-than-expected US economic data, had spiked on the news, but soon gave back some of the gains. It was up 19/32 at 4.21%.

It was indeed a volatile situation out there, but the markets are not yet panicking. Most traders' behavior was just a normal knee-jerk reaction to an unexpected event.

Not all that glitter is gold

Gold futures prices finished US$5.10 higher at US$792.60 an ounce on Oct. 29. The precious commodity is now nearing its record peak of about US$850 per ounce. A dollar slump and high crude oil price prompted traders and investors to enter the bullion market.

Ditto with its white counterpart, the platinum, which is fast-approaching US$1,500 per ounce. The white precious metal closed at US$1,465.50 per ounce on the same day.

Meanwhile, the so-called “black gold” has also been on the rise and already set record prices over the last two weeks. Last Oct. 29, crude oil already reached the crucial US$93 per barrel level at the New York Mercantile Exchange (NYMEX) due mainly to geopolitical tensions. It hit an intraday record of US$93.80 per barrel, before settling at US$93.53 per barrel.

On the other hand, Dubai crude, the benchmark use by the Philippines, lagged a bit behind as it closed at US$84.52 per barrel on Oct. 30.