Central bank credit crisis intervention may be positive for gold and copper

Citigroup analysts see precious metals as “well positioned” given the re-flationary implications of Fed and central bank intervention in credit markets.

RENO, NV - 

Citigroup recently suggested that the "defining features of 2008 may well be reduced volatility in metals prices, and key equities finally moving closer to full market multiples."

Metals analysts John H. Hill, Graham Wark and Paul Cheng said that "recent Fed action, and co-ordinated central bank intervention to thaw credit markets, could be positive for mining and metals if it staves off debt-driven deflation/recession, or spurs the next leg of the re-flation trade. In many ways, this makes M/Metals a test case for global growth re-balancing."

"Our sense is that the ‘non-surprise' of 2008 will be that the U.S. slips into recession, and that the ‘surprise' will be that M/Metals prices remain robust, as suggested by the 5-year futures on copper and aluminum," they advised.

Should a recession occur, Citigroup ranks gold, copper, aluminum, zinc and steel from best to worst among mining and metals.

GOLD

Citigroup observed that "gold is oscillating around $800/oz as speculators have locked in profits. We view the outlook favorable for a test of $1,000."

The analysts said they see precious metals "as well-positioned given the inherently re-flationary implication of Fed and Central Bank action. We would expect strong safe-haven demand in the event of U.S. recession." However, the analysts also noted that gold equities have been underperforming bullion in the fourth quarter "as investment demand has slackened.

Meanwhile, "the IMF is taking measures (e.g. job cuts) aimed at convincing the U.S. and Europe to allow 400 tonnes of gold sales," according to the analysts.

Hill and Wark indicated that "gold shares have finally delivered, after languishing due to the [investment] ‘physical bypass' and high relative multiples compared to FCF-rich [free cash flow-rich] bulk/base miners." They even forecast that "the market is also likely to be shocked at how much cash the major golds generate at $800/oz.'

COPPER

The analysts said they favor copper "as the most defensive, yet aggressively pro-cyclical, China-centric industrial metal." While noting that copper spot prices have fallen below $3/lb., Hill and Wark also affirmed that "medium/long-term dated futures have rallied, suggesting: 1) Metals traders believe a U.S. recession will be shallow, with little spillover to China or 2009/10; and 2) Replacement cost is $2.50/lb."

Other factors highlighted in the Citigroup analysis of copper revealed that November imports were up in China, while Shanghai inventories have declined 57% from October peaks. Smelter TC/RCs are settling low even though there is more available spot concentrate. China Minmet and Jiangxi Copper have agreed to buy out Northern Peru to access resources in Peru. Finally, the cancellation of the Galore Creek project development by NovaGold and Teck Cominco illustrates "the difficulty of developing large, low-grade deposits in remote locations," according to the analysts.

Hill and Wark found that metals futures have been more durable than spot. "This explains why the equities have been insulated and defies headline fears of falling demand from development economies."

Meanwhile, "the futures market suggests the mean expectation is for copper to remain above $2.60/lb ($5,700/T) for the next five years," Citigroup said, adding that "new copper projects probably require $2.00 - $2.50/lb., depending on views of political risk.

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