The fundamental outlook for copper and other base metals, especially those used in steel, is sound, but prices are expected to remain volatile until stock levels have been rebuilt, the Fortis Metals Monthly report for June said.

"Until there is a return to substantial obvious global stocks of copper, zinc, and nickel, we may expect yet more volatility, not least because high prices are creating plentiful supplies of scrap copper, nickel and zinc, and these secondary sources are particularly opaque," analyst Gary Mead said in the report.

Most base metals, together with gold, peaked on 12 May before pulling back strongly as funds took account of a raft of information, including higher interest rates around the world, a softer crude oil price and repeated warnings that the price rises had been overdone.

"There's some concern about inflation, but the fundamentals remain strong," Leigh Clifford, Rio Tinto CEO, is quoted by Bloomberg as saying.

"There's been volatility in recent weeks, but we're still looking at very strong prices," he said. "The important thing is that demand remains strong in the key economies around the world."

On Monday, copper notched up its biggest three-day fall in London since October 2004, the newswire reported. The metal has dropped about 20 percent from its record a month ago.

"We believe that the fundamentals for zinc, platinum, copper and thermal coal remain exceptional, said UBS analyst Daniel Brebner.

He increased his forecast for copper in the second quarter to $3.35/pound from $2.95 and to $3 from $2.80 for the third quarter. His forecast for 2006 is $2.80, up from $2.65.

Brebner revised upwards his nickel estimate for the second quarter to $9.10/pound from $8.25 and $9 from $8 for the third quarter.

Fortis argued that while the market may have been driven hard by speculator fund inflows, there were sound fundamentals masked by the frenetic activities.

"Yet while talk of speculative activity influencing prices has an element of truth, it gives only half the picture," Mead said.

"This surge of interest in copper, nickel and zinc is neither irrational nor misguided but a rather slow response by speculative investors to the perception that today's essential fundamentals for copper, zinc and to some extent nickel, and perhaps out as far as 2010, are compelling," he said.

Using data compiled by various metal study groups, sources and the London Metal Exchange, Mead laid out his argument for supportive fundamentals, particularly for copper, zinc and nickel.

Production from Chile's biggest copper producer, Codelco, the source of 11% of the world's copper output, will slow to 2.5 million tones by 2020, 500,000 tonnes less than forecast last year.

The International Copper Study Group (ICSG) estimated that total refined copper stocks stood at 930,000 tonnes, less than a month's consumption. LME stocks have declined to 111,100 tonnes by the start of June. Shanghai Futures Exchange stocks have come down 12,000 tonnes since the start of the year, Mead said.

China is growing its industrial production is growing at double-digit rates and it is expected to bring 72 gigawatts of electricity generation, roughly the same as Britain's capacity, into being this year, which will further spur copper demand.

"Talk of 'speculative froth' is, in this utterly transformed environment, irrelevant," Mead said, forecasting a three-month copper futures price at between $7,000 and $8,000 a tonne for the next two months, rising to $8,500 in 12 months. The price is seen retreating to $5,000 in two years and $3,000 for the next four years.

The ICSG said on 18 May this year it expected a copper surplus of 244,000 tonnes in 2006, narrowing to 55,000 tonnes next year. Mead says other sources reckon the copper market could be in deficit by 200,000 tonnes, and 100,000 tonnes next year.

According to the International Lead and Zinc Study Group there should be a 437,000 tonne deficit this year and not ease much before the end of the decade. Zinc stocks on the LME are below 10-days' global consumption at 236,875 tonnes.

The International Nickel Study Group expects a 20,000 tonne surplus this year, by Mead says this leaves little space for the unexpected. Nickel stocks are below a week's global consumption. Stainless steel demand is expected to show strong growth, driven by China and India over this year and next. New mine output is not expected before 2010.

Fortis sees the gold price trading between $600 and $650 in the next month, rising to $690 in two months and $710 in three months. It will then show a steady decline from a 12-month price of $600 to $450 in three years and $300 in six years.

The platinum price is forecast to peak at $1500 in Fortis' 12-month forecast, before pulling steadily back to $700 in six years. The 12-month silver price is $10 an ounce falling to $8 four to six years out.

Palladium had its biggest drop in two years, gold fell below $600 an ounce for the first time in almost two months and copper declined on speculation rising global interest rates will curb economic growth and demand.

Metals are down for a fourth session, the longest slide in three months, and billionaire investor George Soros says the commodity rout isn't over. Federal Reserve Bank of Cleveland President Sandra Pianalto said yesterday inflation exceeded her "comfort level," boosting prospects for higher U.S. rates. The U.K. today said inflation reached a seven-month-high in May.

"The fears of a slowing economy are going to cast doubt on the demand for metals," said James Vail, who manages $700 million in natural-resource stocks at ING Investments LLC in New York. "It's a very unsettling time. We're overreacting on the downside as much as we were overreacting on the upside."

Palladium for immediately delivery tumbled $27, or 8.7 percent, to $284 an ounce at 3:28 p.m. in London. A close at that price would mark the biggest percentage decline since June 2004. Copper fell as much as 6.2 percent in London and has dropped 23 percent since reaching a record high on May 11. Gold is down 20 percent from a 26-year high reached May 12.

"Commodities probably are in for a period of correction," Soros told financial news network CNBC yesterday. "We are in a situation where all asset classes are under pressure because of a reduction in liquidity."
Ending rally

Industrial metals have tumbled from records this year, and gold and silver have slumped in the past month from the highest prices since the early 1980s amid growing speculation higher borrowing costs will stifle a five-year rally in commodities.

"The nervousness behind higher rates are anchoring down the markets," said Michael Guido, director of hedge fund marketing and commodity strategy at Societe Generale in New York. "You have massive global equity losses. Many of these funds are selling secondary and tertiary holdings, which happen to be commodities, to raise cash."

Copper for delivery in three months fell $290, or 4.1 percent, to $6,750 a metric ton on the London Metal Exchange. Prices earlier touched $6,600, the lowest since April 21. The metal reached a record $8,800 on May 11. Before today, prices had gained 60 percent in the past year.

Gold futures for August delivery tumbled $23.30, or 3.8 percent, to $588 an ounce at 10:30 a.m. on the Comex division of the New York Mercantile Exchange. On May 12, prices reached $732, the highest since January 1980.
Mining shares

Shares of mining companies also fell. Anglo American Plc dropped 94 pence, or 4.8 percent, to 1,849 pence in London. BHP Billiton Ltd. fell 42.5 pence, or 4.5 percent, to 913 pence. Boliden AB, Scandinavia's only copper miner, slid 7.5 percent to 104.5 kronor.

The European Central Bank raised its benchmark interest rate on June 8 for the third time in six months. South Korea raised its key rate the same day, followed by India and South Africa. At least four Fed officials said last week they're concerned about inflation.

U.K. consumer prices rose 2.2 percent from a year earlier after rising 2 percent in April, the Office for National Statistics said today, making it more likely the Bank of England will raise rates.

"Fears another interest rate rise by the U.S. Federal Reserve might slow economic growth and affect demand for raw materials such as base metals" have deterred investors, Deutsche Bank AG analysts, led by London-based Peter Richardson, said in a report today.
Pumped-up markets

Metals markets "have been pumped to such high levels, a correction was always inevitable," said Robin Bhar, a London- based analyst with UBS AG, Europe's biggest bank. The "trigger" has been "concern about growth and inflation," he said. "Momentum selling" by investment funds has exacerbated the decline, he said.

Speculators increased copper purchases earlier this year amid forecasts global demand will outstrip supply. Investment funds bought more commodities to gain returns unavailable from stocks and bonds.

HSBC Holdings Plc estimated last month about $100 billion will be invested in commodity indexes by the end of 2006, compared with $10 billion at the end of 2003.

On the LME, nickel fell $830, or 4.3 percent, to $18,300. Tin declined $175, or 2.2 percent, to $7,725. Aluminium declined $25, or 1 percent, to $2,475. Lead fell $20, or 2 percent, to $1,000

Gold futures tumbled more than 7% Tuesday to tally a six-session loss of almost $83 an ounce as crude prices fell to a two-month low and the dollar continued to strengthen on expectations U.S. interest rates are headed higher – sapping demand for the precious metal

"Gold now stands at a point where the $300 move it had achieved over the past year has been reversed by 50%, and questions are being raised about its ability to sustain much more damage before the bull cycle is declared as being on a permanent summer vacation," said Jon Nadler, an investment products analyst at bullion dealers Kitco.com.

Gold for August delivery traded as low as $565.50 an ounce on the New York Mercantile Exchange before closing at $566.80, down $44.50, or 7.3%, for the session – intraday and closing levels it hasn't seen since March 23.

The contract has now dropped almost $82, or 12.6%, in value since the June 5 closing level of $648.70.

"Gold will ... have to await (patiently) the return – in earnest – of its formerly loyal physical buyers before one can declare this correction over and not start calling it a bear market," said Nadler, adding that he sees no signs yet that this reversal of sentiment has taken hold.

The decline in the metal Tuesday came as the dollar strengthened to more than six-week highs versus the euro and Japan's yen Tuesday. Growing market convictions the Federal Reserve will lift interest rates at the end of this month supported the greenback.

"The gold market is apparently still concerned about slowing U.S. growth and is mostly expecting the U.S. to raise interest rates again in the June FOMC meeting," Nell Sloane, an analyst at NSFutures.com, said in daily commentary.

And "with a long list of Fed members expressing concern for inflation [Monday], it is clear that the market is fearful of the 'treatment' for inflation, instead of being supported by the news that inflation is still very much a consideration at the Fed," she said.
Opportunity knocks?

Despite the severe losses Tuesday, Peter Grandich, editor of the Grandich Letter, said he believes "the current correction is going to end up [as] the last great buying opportunity in what ... remains the greatest secular bull market in gold's history."

He points out that the risk in gold prices is $25-$50 lower ,while the reward is $200-$500 to the upside.

Overall, "the mindset right now is that gold is not quite through consolidating and so many traders burned by the recent moves in the yellow metal will stand aside and let the bloodletting finish," said Kevin Kerr, editor of Global Resources Trader, a newsletter of MarketWatch, the publisher of this report.

The market needs to experience a "rallying level event" that would persuade short sellers to cover their positions and re-energize the rest of the market, said Kerr. Such an event could be a worsening of relations with Iran, such as a complete breakdown of talks on its nuclear research, or an actual terror attack as retaliation for the death last week of Abu Musab al-Zarqawi, the leader of al-Qaida in Iraq, he said.

But "the ultimate factor is what the Fed does," at its meeting on June 29, he said. "If they do raise rates then much of that will be factored in already. If they don't end up raising rates, things could turn around fast and really throw the market for a loop," he said.
Battle wounds

Gold has now fallen about 22% from its May peak above $730, pulling other metals with it.

Silver was the biggest decliner Tuesday, with its July contract dropping $1.44, or 13%, to close at $9.625 an ounce after a low of $9.60, a level it hasn't seen since Feb. 23.

The plummeting silver price has "nothing to do with a bubble or related driver," according to Paul Mladjenovic, a silver analyst at PM Financial Services in Hoboken, N.J. "There are some very large traders [who are] massively shorting silver, causing an artificial plunge in the silver price," he said, adding that "the situation is great need of scrutiny and enforcement by the CFTC [Commodity Futures Trading Commission]."

Palladium was also a big decliner, with its September contract down $39.05, or 12.4%, to end at $276.70 an ounce. It touched $274.10 earlier, its lowest level since January. Sister metal platinum saw its July contract fall $52.90, or 4.5%, to close at $1,118.50 an ounce after a seven-week low of $1,117.50.

Despite the recent selling pressure, both platinum and palladium are "expected to find good scaled down buying interest with support in platinum pegged at $1,120/$1,100," said James Moore, an analyst at TheBullionDesk.com. "Palladium should look to spend some time in the $275-$295 range," he said in a note to clients.

July copper also tapped a low of $3 a pound, its weakest level since April 21. It closed down 21.8 cents, or 6.8%, at $3.0105. Risk in the base metals "remains to the downside amid concerns over the macroeconomic front (slowing growth/higher inflation) and we recommend standing aside until the outlook is more certain," John Reade, an analyst at UBS wrote in a research note Tuesday.

The sharp move in metals has unsettled many of the fund managers who had rushed into commodities during its steep bull run earlier this year, seeking better returns than were then available on other asset classes, like stocks and bonds.

"The institutional love affair with commodities as an alternative investment class seems to be coming to an end," said John Clemmow, analyst at Investec Securities.

Peter Scales, chief executive of the London Fund Authority said his fund is looking more closely at commodities and conferring with its advisors before investing, said Clemmow.

And the head of France's state pension fund Christophe Aubin has concurred, according to Investec, saying his fund would delay investments if prices remain too high over the next few months.

On the supply side, gold inventories were unchanged at 7.79 million troy ounces as of last Monday, according to data from the New York Mercantile Exchange.

Silver supplies fell by 1.5 million troy ounces to 103.9 million. Copper supplies fell by 88 short tons to 8,842 short tons.