London’s Standard Chartered Bank says it expects most precious metals “to recover some ground in the weeks ahead,” maintaining their view that “gold prices will trend higher over the medium term.”
Nevertheless, Standard Metals Analyst Dan Smith has revised down his gold forecast from $925/oz in the fourth quarter to $850/oz, and reduced his 2009 forecast from $944/oz to $875/oz.
As the gold market is being buffeted by oil and a stronger dollar, Standard expects gold prices “to trend broadly sideways through late 2008 and early 2009. Further upside is expected in late 2009.”
In his analysis, Smith found that gold’s correlation with the USD trade-weighted index averaged 0.52 but rose to average 0.67 this year. “Our FX strategists have revised their view recently and they now expect the USD to strengthen against the Euro to reach 1.3 by the middle of 2009, which will help push down gold prices,” he wrote.
“There will be some more bullish influences through,” he added. “Investors continue to fret about the possibility of a crisis in the U.S. banking sector, helping to boost gold from a safe haven perspective. Also, inflation remains a significant problem in a number of countries-boosting gold as a store of value.”
Despite an 8% reduction in physical holdings of the main Standard & Poor’s Depository Receipt (SPDR) ETF to 651t in mid-August, Smith said, “We believe much of the material is being held for long term-investment purposes, although clearly there is a more speculative short-term component as well. We are assuming that ETF holdings stablise around current levels, although further liquidation represents a downside risk to our forecast.”
Acknowledging that gold has been through a turbulent period during the last few months, Smith noted that the higher trend forecast over the medium term “is likely to be choppy, with bouts of USD strength creating significant headwinds. Nevertheless we are forecasting that gold averages USD 850/oz in Q$ (down from USD 925/oz previously. “
“A stronger USD through the first half of 2009 will keep the market in check,” he added, “but gold should regard its upward momentum in the second half of 2009 to push through USD 1,000/oz. We are forecasting that the price averages USD 875/oz for the year (down from USD 994/oz previously.”
Although Standard Chartered remains pessimistic on aluminum’s long-term prospect, “We believe the price is now close to fair value. High-cost producers are now starting to feel the pinch of lower prices and an important supporting factor is that China’s smelters have stated that their production cutbacks of up to 10% should be extended into year-end,” Smith said.
“Also supportive is that the government is now taxing aluminum alloy exports. This should represent some support on the downside for LME prices.”
Standard’s analysis found that the copper price “remains vulnerable to speculative spikes should major strike action take hold or should the global economy start to show signs of pulling out of its downward trend. More bearish though is that LME stocks have been moving higher, reducing the threat of an imminent squeeze on supplies.”
Smith said that he thinks copper prices “will now struggle to make upward headway in the week ahead. The market has taken on board the deteriorating demand picture, although there is the prospect of a pick-up in Chinese demand in the weeks ahead, post Olympics, as power and coal become more freely available. The main upside risk is that the Chinese government decides to restimulate the economy either through a fiscal boost or through loosening of monetary policy.”
“The lead market has been incredibly volatile through August, much more so than its base metals peers,” Smith noted. “The physical market is already oversupplied according to most estimates and mine supply is accelerating, due to rapid growth in Australia and Bolivia.”
“With both lead and zinc prices now both sharply down on a year ago,” Smith said that some relief has come from mine cutbacks, very lower Chinese exports and low LME inventories.
“Producers need to do more though to prevent a serious market glut developing over the next twelve months. We are looking for lead prices to regain some ground heading into the peak winter season,” he said.
Smith asserted that “nickel has turned out to be the best performer of the base metals in the last few years. The three-month price is currently at USD 22,800/t, up 1.5% from a month ago. While LME stocks are still the highest in the complex …the industry has proved to be very price sensitive and rapid supply cutbacks have had a major impact on the supply-demand balance for this year. This has helped to turn sentiment. As a result we have cut our forecast oversupply for this year by 29kt to 24kt.”
“A key question for nickel going forward is whether a recovery in the stainless steel market will take hold. Over the remainder of this year we are certainly more positive about this sector, which is likely to make double digit gains in H2 at least on a y/y basis,” he noted.
“Realistically though the industry is still facing strong headwinds from a slowing global economy and we expect any optimism to be short-lived,” Smith advised.
Standard noted that tin prices “have been knocked back sharply from their recent highs, showing the market’s vulnerability to broader moves in the commodities complex. …Despite this, tin is still fundamentally in a strong position. While tin consumption will clearly not be immune to the weaker economic backdrop, supply remains tightly controlled and the key producing countries of China and Indonesia-which account for 60% of global output-have both struggled in recent months.”
In fact, Smith expects tin “to be the best performing base metal in the months ahead, with prices remaining high and volatile. While consumption growth is minimal, supply cutbacks will drive the market into deficit.”
Smith said that zinc prices have also held up well through the heavy base-metals sell off. “This is largely because prices are already substantially down from their highs and have already taken on board a large dose of bearish news.”
“One important supportive factor has been an announcement from China’s government that it had removed the 5% VAT rebate that previously applied to the bulk of exports,” he noted. “While this will tighten up global supplies, China’s market could end up being swamped with excess metal.”
Meanwhile the slumping European and U.S. housing market “also raise question marks about future offtake from the construction sector-an important market for zinc consumers,” he added.
Smith continues to believe that “the medium term outlook for zinc is pretty dire. The market is being hit by a double whammy of rising mine supply and weakening demand growth, with galvanisers particularly exposed to the housing and construction markets. Prices should trend lower in the months ahead.
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