fundamentals will prevail

UPDATE 1-COMMODITIES-Metals, oil steady but volatility deters
Thursday 25 May 2006, 7:03am EST

By James Regan and Clare Black

SYDNEY/LONDON, May 25 (Reuters) - Metals and oil stabilised on Thursday but markets were still reeling from heavy losses and high volatility kept volumes thin.

Violent price swings this week have caused many investors, consumers and trade houses to shun the markets for now.

An uncertain outlook for interest rates and inflation in the world's biggest economy, the United States, has triggered volatility across the financial markets. Investors have dumped commodities and equities, seeking shelter in safe havens cash and bonds.

Copper -- one of the most unpredictable markets at the moment -- staged its biggest-ever one-day gain, of 11.4 percent on Tuesday but slid heavily a day later.

"The market is very volatile, very choppy and very hard to trade," said a Hong Kong dealer in London Metal Exchange-traded contracts.

"Fewer people are doing anything in this market, and so when someone does something, it moves exaggerated because nobody wants to hold positions too long when we've got up to a $1,000 range in a day," he said.

Responding to claims by analysts that metals markets had become virtually untradeable because of uprecedented volatility, LME Chief Executive Simon Heale said the exchange's role was not to protect participants against losses. [nL25341180]

"It is not the role of the exchange to decide what the price should be or to speculate or forecast what it should be," he said.

The Reuters/Jefferies CRB Index <.CRB>, a basket of 19 commodity futures, fell 2.8 percent to 342.51 points at its close on Wednesday.

A stronger U.S. dollar had discouraged commodities buying, but the currency edged lower on Thursday.

Gold -- which plunged 5 percent on Wednesday -- was firmer at around $647.30 , but the metal, used in jewellery and as an investment, is now well below its mid-May 26-year peak of $730.

U.S. crude rose 22 cents to $70.08 a barrel after losing 2.7 percent on Wednesday. London Brent crude gained 18 cents to $69.40.


HIT THE ROAD

Oil retreated on Wednesday on signs the United States held plenty of gasoline to keep motorists on the road through the summer.

"The strong build in gasoline stocks revealed yesterday certainly nudges some of the bigger issues out of the way," said Justin Smirk, senior economist at Westpac Bank in Sydney. "Before the U.S. summer, there is always a cyclical focus on stock levels."

U.S. gasoline stocks rose by 2.1 million barrels last week, well ahead of the 1.2 million forecast, as refineries delivered increased output ahead of the Memorial Day holiday on May 29.

Copper clambered up above $8,000 a tonne after its sharp fall overnight and was selling for around $8,180 a tonne -- more than twice the price of a year ago.

But more and more traders were becoming concerned about their ability to do business in such conditions.

"There is no confidence in these markets, no conviction. Copper could go down $300 just as easily as it went up," an LME dealer said.

Despite the speculative froth in the base metals complex, most of the markets have critically low stocks and a muted supply-side response, a situation made all the worse by buoyant demand.

Union workers at Grupo Mexico's (GMEXCOB.MX: Quote, Profile, Research) giant Cananea copper mine shut out some subcontract labourers on Wednesday, the latest labour unrest to hit the company as it struggles with a strike at its La Caridad mine. [nN24145627].

But Anglo-Australian mining giant BHP Billiton (BLT.L: Quote, Profile, Research) said it expected to start producing from some of its big new projects, adding almost 400,000 tonnes of copper to its output. [nN24329371].

LME-traded aluminium and zinc also stabilised, gaining 1 and 2.6 percent respectively.

Mining equities took heart from the steadier tone, with four miners appearing in the day's top 10 gainers (.NG.L: Quote, Profile, Research).