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Weak Dollar Helps Send Commodities To Dizzying Heights

  • Kathleen Moore

Looking attractive

Looking attractive

Another day, another record high.

Gold today has been selling for $1,070 an ounce, its highest nominal price ever.

But it's not just gold. The prices of many commodities, from silver and copper through oil and agricultural raw materials like sugar, have soared this year.

Oil is up more than 60 percent to a year-high of $75 a barrel. Other precious metals like platinum and palladium are at their highest levels in a year. Copper has doubled in price during 2009. Cocoa is at its highest level in 20 years, and sugar is at its most expensive since 1981.

Analysts point to two main factors driving prices up-- the decline of the dollar, and hopes for an economic recovery following the world's worst slump in decades.

Those hopes mean investors who sheltered from the storm by buying up U.S. dollar assets are increasingly looking for bigger returns elsewhere.

And analysts say there's also a lingering worry that massive U.S. government spending to pull the economy out of recession will end up spurring inflation.

Supply And Demand

The dollar is at its lowest level against Europe's single currency in more than a year, with the euro now buying more than $1.48.

That's making gold and other dollar-priced commodities look attractive to investors with currencies other than the greenback.

Another factor driving up the cost of sugar is the growing amount of sugarcane, particularly in Brazil, that is turned into ethanol fuel.
"Certainly the commodity story has been a fairly general story," says Nick Penney, a sugar broker at commodities trading firm Sucden Financial. "Gold is at record highs. Basket traders, e.g. hedge funds, tend to diversify and buy a basket of commodities and sugar is one of them and is a main one. But unlike previous years, previous price spikes, sugar this time has its own fundamental story."

That story is one about demand outstripping supply, thanks to bad weather in big producers India and Brazil. That helped send raw sugar prices briefly above 45 cents per kilogram last month -- double what they were a year ago.

It's been a similar story with cocoa -- a shortage due to a poor harvest in key growing areas has driven prices to their highest since 1989 (above $3,300 a metric ton).

Another factor driving up the cost of sugar is the growing amount of sugarcane, particularly in Brazil, that is turned into ethanol fuel.

"There are times when the crude market goes up so will sugar because there will be more demand for ethanol as the crude price rises. So that also has an influence," Penney says.

Strong Base

The commodity rally has touched base metals, too.

Copper prices reached a year-high of above $6.360 a metric ton last week -- double their level of the start of the year.

Aluminum has risen by some 25 percent, and zinc is at its highest in more than a year. That's despite the world's worst economic slump in decades, which has cut into demand for metals almost everywhere.

"For base metals it's hope that the world economy will recover from the worst recession since the Second World War, and we saw some strong Chinese buying in the first half of the year. That helped base metals markets," says Carsten Fritsch, a commodity analyst at Commerzbank in Germany. "They were rather balanced [in demand and supply] without that special factor because demand outside China is still quite weak, and inventories [stockpiles] have still risen."

Where will commodity prices go from here? Analysts say that, in the short-term, much depends on the dollar.

Certainly gold still has a long way to match its real all-time high, which it hit in 1980. Back then, an ounce sold for around $850 -- worth about $2,300 today.

Longer-term, Jim Rogers, one of the world's best known and successful investors, said last week that the commodity boom still has some way to go.

The reason, he said, is simple -- for decades to come, supplies of raw materials, especially agricultural commodities, will struggle to keep up with demand.
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