COMMODITIES-Commodities sag as Korea shelling fuels dollar

Tue Nov 23, 2010 7:30am EST

* Gold hits a one-week high on security concerns

* Escalating Korea tension not positive for Asia growth

By Pratima Desai

LONDON, Nov 23 (Reuters) - Commodity markets buckled on Tuesday as worries over an exchange of artillery fire between North and South Korea and concern that Ireland's debt problems could spread in the euro zone sent the dollar higher.

Crude oil and copper slipped after North Korea fired artillery shells at a South Korean island, hitting a military base and drawing return fire, prompting a flight to safe assets such as gold and U.S. Treasury bonds. [ID:nL3E6MN09Z]

"You'll certainly see selling in risk-based markets like equities and commodities until we get a better read on events," said Mark Pervan, ANZ senior commodities analyst in Melbourne.

"There should be reasonable support for gold although we often see a firmer dollar as the initial reaction to risk and lower gold prices, but industrial metals might get hit."

U.S. crude for January CLc1 shed 47 cents to $81.27 a barrel by 1151 GMT, after dropping 71 cents on Monday. ICE Brent LCOc1 was down 54 cents to $83.41 a barrel.

Olivier Jakob at Petromatrix said covering of short positions -- bets on lower prices -- ahead of a long weekend was normal. The U.S. Thanksgiving holiday is on Thursday with many traditionally extending their break to make a long weekend.

"The recent political uncertainties in Ireland and the military escalation between North and South Korea would plead for reduction of risk," Jakob said.

"Given that the main area of growth is out of emerging Asia, the escalation of tensions between North and South Korea is not a positive development for oil markets." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a map showing where the artillery exchange took place between the two Koreas click:

here

For a graphic of the components of Reuters Jeffries CRB Index of commodities, click:

link.reuters.com/kew48n) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

EURO PRESSURE

The euro came under pressure as political uncertainty in Ireland and worries about other heavily indebted members of the 16-nation euro zone doused optimism over a bailout plan for Dublin. [FRX/] [MKTS/GLOB]

"There is some readjustment going on in commodity prices -- to do with the dollar," said Ian Morley, chairman of fund consultancy Wentworth Hall.

"Commodity prices were too high, though people are worried about inflation, that is why they have been buying commodities.

Fears of hyperinflation have been triggered by the vast amounts of liquidity pumped into the global economy by governments and central banks in the aftermath of the 2008 financial meltdown, particularly by the United States, the world's largest economy.

Commodities often move in the opposite direction to the dollar. A rising U.S. currency makes dollar-denominated commodities cheaper for holders of other currencies.

Spot gold XAU= was down at $1,361.89 a troy ounce from $1,366.09 late on Monday. U.S. gold futures GCZ0 rose 0.4 percent to $1,364.10 an ounce.

Earlier spot gold touched a session high of $1,369.75 an ounce, its highest in more than a week as investors fretted about security in Asia. That compares with a record high of $1,424.10 on November 9.

Benchmark copper CMCU3 on the London Metal Exchange fell to a one-week low of $8,050 a tonne from $8,290 on Monday.

The metal used in power and construction was last at $8,100 a tonne compared with a record high of $8,966 a tonne on November 11.

"Whenever there is a correction it presents a buying opportunity," said Societe Generale analyst David Wilson.

"No one in China is worried about rate hikes slowing down demand for metal... Speaking to copper producers, they all have full order books. Even the tier four cities are on a huge building spree and it's not slowing down." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Korean exchange, Irish debt hit markets: [ID:nL3E6MN07F] Two Koreas exchange fire at sea border: [ID:nTOE6AM01Q] Factbox on Korean peninsula military forces:[ID:nL3E6MN0EJ] Factbox on N. Korea's nuclear programme: [ID:nTOE6AK00L] For map:

here

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(Additional reporting by Nicholas Trevethan; editing by Keiron Henderson)

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