Scotiabank’s commodity price index, which measures price trends in 32 of Canada’s major exports, advanced by 1.3% month-over-month in August.

The all items index reached a new record high, slightly surpassing the previous peak last May, and up 112.8% from the cyclical low in October 2001. However, after the second most powerful upswing since the Second World War, the August record may represent the cyclical peak for this business expansion.

”Oil prices have lost momentum alongside a narrowing of the ‘geopolitical risk premium,’ at least temporarily, with a somewhat more conciliatory approach by the United States, aimed at negotiating an end to Iran’s uranium enrichment program,” said Patricia Mohr, vice-president and commodity market specialist, Scotia Economics. “Some cooling in investor sentiment may also be related to anticipation of the beginning of a supply response to recent record prices for oil and base metals. However, it should be recognized that much of this supply response has not yet occurred.”

London Metal Exchange nickel prices spiked to US$15.76 per pound on Aug. 24, well above the previous US$10.84 per pound record of March 1988. Robust international stainless steel consumption, including greater than anticipated demand for high nickel-containing austenitic rather than ferritic steels, partly accounts for the spike in nickel.

An LME short position held by South Korea’s major steel producer, which must be covered by Sept. 29 in an environment of critically low LME stocks, has also added to upward speculative pressure. Although nickel prices have eased back to US$14.11 in late August and prices may revert to somewhat lower levels in October, the strength of global stainless steel demand should keep prices quite lucrative in 2007.

Uranium remains a top pick for investors. Spot uranium prices advanced to US$54 per pound in mid-August, up from an average of US$46.20 in July and US$47.75 in August. Term-contract prices are now also at the US$54 mark. Given exceptionally tight mine supplies, we have revised up our price forecast for uranium to an average of US$46.45 for 2006 and US$60-US$65 for 2007. Prices averaged US$28.15 in 2005.

”Mine production has responded to the rejuvenation of uranium prices in recent years, advancing by 12.9% in 2004 and 3.4% in 2005 to about 108.1 million pounds of U(3)O8. However, a huge gap still exists between global mine production and utility consumption, with mine output only supplying 64.4% of demand last year,” comments Mohr. “Mine production may have dropped in the first half of 2006, with mill maintenance in Canada and lower-than-planned output at Australia’s Ranger and Olympic Dam operations. The balance of demand must be met from tight spot market supplies held by traders and brokers and from other secondary sources such as the HEU Agreement with Russia (highly enriched uranium), recycling and limited government inventory sales.”

The outlook for silver prices also looks quite promising. Silver has outperformed gold this year, with the London Silver Fix rising 59% year-over-year as of Sept. 27 compared with a 28% advance for gold (London PM Fix). The introduction of a silver ETF (Exchange Traded Fund), backed up by silver bullion, on the American Stock Exchange on April 28, has added substantially to investor demand. Silver has also benefitted from its role as an industrial as well as a precious metal, with new uses for silver in electronics (flat screen TVs and mobile phones) and in medicine more than offsetting a further decline in photographic demand last year.

Silver, as well as gold, should move higher in the first half of 2007, given the vulnerability of the U.S. dollar to a further decline. The London Silver Fix should average just over US$11 per ounce in 2006 and at least US$12 in 2007, up from US$7.31 in 2005 and an average of US$5.09 from 2000-2004. Prices could temporarily spike over US$15, though new mine start-ups may start to moderate prices in the second half of 2007.

West Texas Intermediate oil prices eased back to US$73.08 per barrel in August from US$74.46 in July, during which prices rose to an intra-day trading record of US$78.40 on July 14. Prices briefly tumbled below the US$60 mark in mid-August, before rebounding to US$62.76 late in the month, as traders bought back previously sold positions. Benign U.S. weather this fall — not only the absence of hurricanes in the U.S. Gulf, but also mild temperatures — as well as negative reaction to high prices has allowed U.S. crude and refined product stocks to rise to a comfortable 6.9% year-over-year. However, expectations that OPEC will cut output if prices consistently drop below the US$60 mark, has triggered short covering in recent days.