Don’t be fooled by January’s 7.2-per-cent drop in the TD Commodity Price Index (TDCI) in U.S. dollars. If a 33-per-cent weather-related pullback in natural gas prices is excluded from the count, the index actually rose by 5.3 per cent in the month, as most other commodities extended their recent rallies into early 2006. Base metals and crude oil have continued to shine brightly on the world’s resource stage, bolstered by ongoing concerns about tight supplies, while increases in gold and silver prices were fuelled in part by buying activity related to the launch of exchange traded funds (ETFs).

Not only do we hold firmly to our belief that the TDCI is at or near its peak, our conviction, if anything, has strengthened. This is because momentum-buying – rather than any improvement in underlying fundamentals – appears to have taken over the wheel in the current rally. Predicting the timing of the start of the all-too-inevitable downswing is no easy task, but in our view the likely sentiment-shifting factor will be a significant moderation in U.S. growth in the second half of 2006, which will both weaken U.S. demand for commodities and raise concerns about a ripple-through effect on the world economy. So, while commodity prices may hold at stratospheric levels over the next few months, look for prices to broadly recede by the late spring, when signs of cracks in the U.S. economy become more visible. By year-end, we expect the U.S-dollar TDCI to sit some 19 per cent below current levels – still leaving the index at a relatively high level, but enough of a drop to take some of the bloom off the rose.

Derek Burleton, AVP & Senior Economist
416-982-2514

Priscila Kalevar, Economist
416-982-2555