Bank of Nova Scotia’s commodity price index lost ground in July for the second straight month, weighed down by falling metal prices including those of zinc, nickel and uranium.

And the sell-off in the metals has worsened since then, with prices for nickel, zinc and aluminum declining to their lowest levels in more than 12 months last week, noted Patricia Mohr, vice-president of Scotia Economics. “Hedge funds — involved in the securitization of subprime mortgages — were forced to liquidate their profitable commodity market positions to cover margin calls, stepped-up bank collateral requirements and fund redemptions by investors,” Mohr said in a release.

Mohr added that the “widening credit spreads (including a backup in commercial paper rates), recent equity market turbulence and a very weak U.S. housing market (with falling house prices) have also raised fears over a further U.S. economic slowdown.”

But it was the need for cash, rather than a re-assessment of the outlook for metal prices, that was largely responsible for the Aug. 16 sell-off by hedge funds, she said. Since that time, base metal prices have rallied modestly, helped by last week’s half percentage point reduction in the U.S. Federal Reserve Board’s discount rate.

But not all metal and mineral prices have been sliding, she noted. Copper prices have proven to be quite resilient and potash prices are setting record after record.

The commodity price index itself, which tracks price trends in 32 of Canada’s major exports, eased 0.7% in July, but is still 10.5% higher than a year earlier. A big gain in the agricultural index, thanks to rising wheat, canola, barley and Atlantic Coast lobster prices, together with a slight increase in the forest products index helped offset the weakness in metal prices last month. The Canadian Wheat Board’s asking export prices for No. 1 grade spring wheat increased to $291 a tonne in July, up from $261 a year earlier, and then rose to $301 or $286 (U.S.) in early August. The latter price is very close to the $292 record in May 1996.