The commodities bull run

By Staff Writer


From Business Report
October 16 2007
By Ethel Hazelhurst

Johannesburg - A surge in commodity prices yesterday brought good and bad news to South African consumers. A basket of oil prices yesterday hit new record highs, ranging from $81 (R549) a barrel to more than $85 - bringing the prospect of higher domestic fuel prices.

But the bull run in commodity prices, which drove oil to record levels, did the same for platinum and gold.

Platinum hit a record high of more than $1 429 an ounce, while the gold price reached its 27-year high - $758.85 an ounce - said Chris Hart, an economist at Investment Solutions.

The strong gold and platinum prices, as well as cash flowing into South Africa's money market, buoyed the rand, offering some protection against higher dollar prices.

The currency temporarily broke through the psychological R6.71 barrier in the morning to reach R6.7023, according to I-Net Bridge. But it fell back in the face of importer demand for the dollar, said David Gracey, head of forex trading at Nedbank Capital.

It ended the day at R6.7723, near last week's 14-month high, and up 10 percent against the dollar from its trough of R7.40 on August 16.

Tony Twine, an economist at Econometrix, said as a rule of thumb, a $1 a barrel move in crude oil translated into a 7c increase in the refined product in South Africa while a 10c shift in the rand against the dollar meant a 2.2c increase at the pump.

However, Twine said: "It's difficult to quantify a net effect because they both move constantly and independently, either complementing each other or offsetting each other."

Twine attributed the recent rand strength to the attractions of the higher yields offered by South Africa's relatively high interest rate regime. They include investors who need to park surplus funds, as well as speculators who borrow in low interest rate currencies and make a quick profit by reinvesting in high-yield currencies.

A common source of funds is Japan, where the central bank charges 0.5 percent on money lent to the private sector compared to the SA Reserve Bank's official 10.5 percent repo rate.

The rand is not the only emerging market currency to show recent strength. Most are benefiting from the weaker dollar, after a 50 basis point cut in the Federal Reserve funds target rate last month to 4.75 percent.

While the rand has gained about 4 percent in the year, Bloomberg reported yesterday that the Indian rupee had rallied 12 percent, the most since 1974; the yuan had climbed 3.9 percent, its fastest appreciation since China ended a peg to the dollar in 2005; and the Singapore dollar hit a 10-year high after its biggest monthly gain since 2001.

Nedbank group chief economist Dennis Dykes said emerging markets were benefiting from a change in how investors perceived risk. In the past, emerging markets were the first casualties of any slowing US in the economy.

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