Hello US$130 oil

The macroeconomic effects of higher oil prices made headlines around the world during the week ended May 24, the 21st trading week of 2008.

• Just when people were starting to get used to US$100-per-barrel oil, crude prices started surging upwards again in recent weeks, peaking at an all-time record above US$135 per barrel on May 22 and defying widely held expectations for a correction.

The world is feeling the bite from rising commodity prices, with prices for wheat, corn, rice and soy all hitting record prices this year, triggering inflation concerns in emerging economies, particularly ones with currencies pegged to the U. S. dollar.

China, which is seeing its exports decelerating sharply in real terms, looks to be using monetary controls rather than currency revaluation to fight inflation. It’s a tricky balance, as the Chinese government does not want to be too strict at a time when the economic outlook for industrial countries is deteriorating month after month.

• Recent data from the World Gold Council showed how the yellow metal fared during the first quarter against a backdrop of turbulent financial markets. With the global credit crunch and growing inflationary pressure, dollar demand for gold reached US$20.9 billion in the first quarter, up 20% from a year earlier and more than 100% from four years ago. However, tonnage demand for gold in the first quarter plummeted 16% to 701 tonnes — the lowest quarterly figure in five years.

• There are still lots of gold bulls out there: Aussie-listed Sino Gold Mining has announced it will raise A$136 million in order to retire its gold hedge book and leave its shareholders fully exposed to spot gold prices.

At the same time, Gold Fields and Sino Gold said they would expand their joint exploration efforts in China, and the major would increase its stake in the junior gold producer to 19% from 15.5% with a A$68-million cash injection.

• Johnson Matthey unveiled new platinum and palladium market stats with the release of its major Platinum 2008 review.

The refiner found that the platinum market was in deficit by 480,000 oz. in 2007. This was caused by production disruptions in South Africa that drove global supplies down to 6.55 million oz. even as demand shot up 8.6% to 7.03 million oz. due to very strong growth in autocatalyst and other industrial uses.

Palladium was a different story, with its market in surplus by 1.75 million oz. last year. While demand rose a healthy 3.5% to 6.84 million oz. (again owing to increased use in autocatalysts) against a backdrop of stagnating production, heavy sales by the Russian government from its stockpiles took total supplies to 8.59 million oz.

Spot prices for the most expensive precious metal, rhodium, soared to record levels above US$9,800 per oz. in mid-May, up from the US$7,000-range seen just six months ago. Five years ago, rhodium traded as low as US$440 per oz.

Autocatalyst demand alone exceeded rhodium mine supply last year, according to Johnson Matthey. South Africa and Russia are the two key sources of mine supply.

• Townships around Johannesburg, South Africa, exploded in anti-foreigner violence, leaving at least 42 dead and 16,000 homeless after a week-long rampage by marauding gangs. South African troops and police had restored order on the streets by May 23.

DRD Gold’s century-old ERPM gold mine is situated near the Ramaphosa squatter camp, in the heart of where the mayhem occurred, and most of its workers stayed home, fearing for their lives. About a third of ERPM’s 2,000-person workforce is from Mozambique, Lesotho and Swaziland, and mobs murdered two ERPM miners. By May 26, the workforce had returned to their stations.

• Our favourite grassroots exploration result came from Hathor Exploration’s work in the recently discovered Roughrider zone at its Midwest NorthEast uranium prospect, in northern Saskatchewan’s Athabasca basin. The drilling cut 15 metres grading 10.02% U3O8 in hole 8-20 and 9 metres of 10.06% U3O8 in hole 08-21. Terra Ventures owns a 10% production carried interest in the property.

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