A rise in the gold price to $2,000 an ounce by the end of 2013 and copper averaging $7,750/ton by Q4 that year are among the predictions of Francisco Blanch head of commodities research for Bank of America Merrill Lynch. This is perhaps one of the more optimistic forecasts in a spate of reports from commodity analysts at major banks released at this time of the year – analyses which mostly, in the past, have tended to err on the conservative side. Indeed if one goes back four or five years bank analysts were notoriously poor at predicting the commodity price boom/bust/boom scenario which developed seemingly sticking to forecasts which were a couple of percentage points above, or below, the prices pertaining at the time the forecasts were made.

An exception may have been at this time last year with respect to gold where many mainstream analysts were looking for a rise to $2,000 in 2012 following the yellow metal’s heady increase in 2011, but they were quick to change these as the gold price failed to take off and although it has seen around an 8% increase so far this year (the 12th year of price rise in a row) from its level at the beginning of January (but still way below the brief $1900+ peak of early September 2011) – market machinations have meant that it has not managed the gains many had been predicting. The forecast rises were largely predicated on heavy bouts of QE in the U.S. and Europe, but these, although they have indeed been implemented, have not had the effects many price pundits had been anticipating.

But what of BofA Merrill Lynch’s predictions this year – are they likely to be any better, or worse, than bank analysts’ past performances? What the forecast is anticipating is the likelihood of large commodity price swings as economic turmoil persists in Europe and the U.S. faces a year of little growth – perhaps recession if the ‘Fiscal Cliff’ negotiations between Democrats and Republicans continue to make no progress, although past patterns suggest some kind of unsatisfactory 11th hour compromise will be reached. But even if it is it may well still involve some tax rises and some spending cuts, which combined will not make for an easy start to the year for the U.S. economy.

As in the past, though, the forecast suggests that a resurgent – or at least a partly resurgent – China, along with growth in developing nations, will come to the rescue of the metals commodity markets, aided by production restraints in some metals sectors which are perhaps causing earlier anticipated surpluses to morph into balance or even deficit.

While the BofA report suggests a ‘rise’ in the copper price, the predicted Q4 average – note the word average – of $7,750/ton is actually below the red metal’s spot price at the moment so this is in effect a pretty conservative figure – despite the report suggesting that the copper price will be one of those benefiting from a Chinese return to growth at higher levels than the perhaps current level of around 6-7% (wouldn’t Western governments give their eye teeth for a 6% growth rate!). Indeed there are signs that Chinese higher level growth is already beginning to return and the new leadership there will be keen to ensure that the nation’s growth is at least seen to be positive (i.e. at least above the 2012 figures) and there is already evidence that industrial demand there is beginning to pick up again shown by the recent boost in base metals and iron ore prices. The question is is this sustainable?  With China anything seems to be possible, although expect a bit of a hiatus in industrial metals demand immediately ahead of the start of the Chinese New Year – although the reverse could be true in precious metals prices.

On precious metals the BofA analysis is actually rather more positive. The $2,000 forecast for gold by Q4 is around a 16-17% rise from the $1710, or thereabouts, level pertaining at the moment and the report suggests perhaps even better things ahead for silver which it says has scope for a 20% rally from current levels. That would still only take it to around $40 – well below the predictions of the silver bulls, but silver is a particularly tough market to predict, particularly with the huge overhanging short positions on COMEX. 

Platinum and palladium are seen as among the supply constrained metals which should benefit from higher prices next year, which would seem logical after the South African strikes and the likelihood of some mine contractions due to consequent production economics, but supply/demand predictions are notably difficult in this sector with wide swings between analysts’ views. If one goes back to some of the huge platinum surplus predictions of early 2012 and subtract the loss in South African mine supplies because of the strikes, one still ends up with a big surplus, yet analysts seem now to be predicting a reasonably large deficit for 2012. And, the latest figures from Statistics South Africa suggest that mine supply of platinum is indeed picking up very fast from its strike-hit levels. One doubts if the true picture will appear until perhaps the end of Q1 next year.

The job of bank analysts cannot be an easy one as anyone who has tried to predict say the gold price one year ahead will tell you. All kinds of factors can come into play, particularly in the precious metals sector where the whiff of some kind of price manipulation, be it by banks (Central or commercial), other financial institutions or governments, and for whatever reasons (currency stabilisation or pure speculative gain) is forever with us. Industrial metals, and this should include pgms at least, should be easier to predict, but with supplies dependent on all kinds of political, geographical, geological and technical factors, and demand on largely difficult-to-forecast macro-economic scenarios, medium term analysis tends to be something of a lottery.

If one looks at true long term trends though, the future does look generally positive for metals prices. Long term supply growth is indeed being constrained as new mine developments and expansions are put on hold or deferred indefinitely as banks are loath to lend the kind of money required to build a big modern-day mine, while the junior exploration sector has been decimated in the ongoing stock market decline hitting the mining sector. Global population, and wealth, continues to rise so demand continues to increase.  Ultra long term things thus look good for commodity prices, but over a one or two year period price prediction remains a bit of a lottery – perhaps one should just assume the overall trend is upwards, but there will be many peaks and troughs on the way.