Looking ahead, gains in commodity prices will be harder to come by
over the next 4-6 quarters:

- For a number of commodities - notably, crude oil, nickel, zinc and precious metals - the fickle flows of investors rather than any meaningful improvement in current supply-demand fundamentals have been behind the recent rally. In fact, the challenge of excess stockpiles extends
through most areas of the commodity complex.

- The investment lure of commodities as a hedge against the U.S. dollar is likely to continue in the short run, but further scope for greenback depreciation appears limited. In fact, a respite in the U.S. dollar appears likely as 2010 progresses.

- While we expect supply-demand conditions to strengthen in tandem with the global economy, the rate of economic recovery is likely to be gradual compared to the past recoveries. Despite our upwardly-revised growth forecast for a 3.8% rebound in world real GDP growth in 2010, the level of world output will remain quite depressed.

- There is a considerable amount of excess capacity within most commodity areas. So as demand revs up, production can easily be increased. But, as demand picks up and prices begin a sustainable recovery, producers will be tempted to ramp up output in order to capitalize on the higher prices. As such, it will take a great deal of producer discipline to work down the excesses and balance
the market.

- Over the next few months, a scaling back in Chinese consumption appears to be an impediment to a sustained rally in forest products and base metals. In the first half of 2009, robust demand from China helped to underpin prices. However, it appears as though demand was not sufficient to keep pace with imports, leading to a rise in stockpiles, and more recently, a fall in forest product and
metal imports into China. We suspect that this destocking trend has not yet run its course.

Natural gas prices to outperform

The TDCI is expected to end next year a healthy 15% above its September 2009 average. Still, if a continued recovery in natural gas prices is removed from the equation, the index is expected to grind ahead by only 6%. On a brighter note, momentum in commodity markets should pick up and broaden in 2011, as the world economy continues to normalize. The accompanying chart shows TD Economics' projected changes by commodity, up to and including 2011. Natural gas prices are forecast to rise by almost 150%, outperforming all other commodities in the index. Forest product prices will be among the top performers, with lumber prices expected to jump by 70% and newsprint prices to gain 50%. Meanwhile, precious metals prices will fare the worst, with the sub-index sinking 20% during the forecast period. Overall, we expect the TDCI to rise 35% by the end of 2011, and the index excluding energy to gain a more modest 13%. This will bring the TDCI back to levels seen in the third quarter of 2007, prior to the rapid run-up in prices seen towards the end of 2007 and early-2008.