Deutsche Bank mildly bullish on gold into 2H09, silver to outperform

As Deutsche Bank forecast the Central Bank Gold Agreement soon will be extended another five years, bank strategists advised the influence of gold ETFs on gold prices is starting to wane.

RENO, NV - 

In an analysis published Monday, Deutsche Bank predicted the IMF will become an associate signatory to the Central Bank Gold Agreement, which the bank's research team forecast will be extended another five years over the next few weeks.

Meanwhile, Deutsche Bank is maintaining "our mildly bullish outlook for gold into the second half of the year."

The research team also views "any correction in the gold price as short-lived given our belief that a tightening in the US monetary remains a distant prospect."

New EU members-Cyprus, Malta and Slovenia-are likely to join the Central Bank Gold Agreement, Deutsche Bank strategists Michael Lewis and Xiao Fu suggested.

"We believe the macroeconomic environment remains broadly supportive for gold, namely negative US real interest rates when deflated by core CPI, skittish global equity markets, and a relatively weak US dollar," they advised. "However, we would view deflation, and the resultant rise in real interest rates, as problematic for gold returns."

"After the US dollar and real interest rates, we believe gold ETFs have played a major role in driving the gold price over the past year," Lewis and Xiao suggested.

 However, they added, "we believe the influence of gold ETFs is starting to wane. This has important implications in our view, since we believe gold ETFs have been responsible for introducing distortions into the gold market, namely gold's ability to trade rich relative to the US dollar and facilitating a significant flattening in the gold forward curve as the financial crisis increased the convenience yield in holding gold."

Deutsche Bank suggests diversification by central banks and sovereign wealth funds into gold "may provide another source of medium term support for the gold price. ...Of more immediate interest, in our view, is the activity of European central banks and specifically the arrangement surrounding the Central Bank Gold Agreement (CBGA)."

"We find that over the past few years there has been a steady reduction in gold sales during the course of the second CBGA," the strategists said. "Since the current agreement expires at the end of September and given the strong likelihood that it will be extended to another five years, we expect an announcement on CBGA III will occur over the next few weeks. We believe the main event risk will be the possibility of IMF gold sales."

Silver

Given the risk of central bank gold activity to the gold price, Deutsche Bank anticipates "the ongoing out-performance of silver relative to gold."

"Indeed we believe the production cuts that have occurred across the industrial metals complex may have important implications for silver," the strategists asserted.  "We find that of total silver production, more than 60% is mined as a by-product with other industrial metals such as zinc, lead and copper.

"We believe silver production could face similar challenges to the ones likely to occur across the industrial metals complex as a result of the significant decline in capex spending that has occurred over the past two years," they said.

PGM

Meanwhile, Deutsche Bank strategist Gary Pearson believes "the case for robust PGM demand and prices remains intact in the long term, although one has to recognize that recent global turmoil and collapse in developed and to a lesser extent, developing market vehicle sales is unlikely to show material improvement in the next year."

"We believe the basis for strong PGM prices in the medium term continues to be founded on accelerating consumer demand most significant in autocatalysis and a further recovery in ETF purchases," the strategists noted. "As the long term fundamentals of these [PGM] markets remain strong, we believe prices are likely to recover from current levels in time, but we remain generally cautious for the next two years."

"A potentially significant buffer could include continued disruptions or deliberate closures at the South Africa operations," Pearson advised. "We may also be pleasantly surprised at jewellery off-take and investment demand in the current, low-price environment, despite obvious pressures on private consumers."

Palladium

"In the short term, it appears that palladium's destiny will be largely dictated by the fortunes of the US auto manufacturers," Deutsche Bank advised. "As a result, it appears unlikely that the metal price will recover substantially over the next year."

‘However, over the next three years we believe palladium market fundamentals will improve significantly, with symptomatic evidence of reverse substitution in autocats (largely complete in gasoline autocats but increasing in diesel autocats from the current 10% to around 30% of the PGMs in the catalyst over the next few years) as well as improved jewellery off-take (although the last three years have seen declines in off-take, we believe consumers have absorbed the high levels of manufacturing purchases seen in 2005, which bodes well for the future once the global economy stabilizes)."

"Unfortunately, we expect the overhang of above-ground stocks (around 8m ounces in Zurich and anywhere between 2m ounces and 10m ounces of Russian stock) to limit the upside for the palladium price in the foreseeable future."

"Our final concerns is that the Russians, both Norilsk and the government, given their sizeable presence in the market, may seek to influence the palladium market if prices move aggressively higher to provide peace of mind to vehicle manufacturers (to avoid a repeat of the price spikes of the turn of the century that resulted in substantial write-downs)," Pearson concluded.

SUBSCRIBE to Mineweb.com's free daily newsletter now.

Disclaimer

MINEWEB is an interactive publication, with rolling deadlines through each day, commencing in the Sydney morning,  and concluding, 24 hours later,  in the Vancouver evening.  If you believe your side of an issue deserves inclusion, but has failed to meet one of our deadlines, you are invited to notify the Editor in Chief in Johannesburg, and we will include you in our editing and expanding on our stories. Email him at alechogg@gmail.com

Print story      Email story      Subscribe to free newsletter

Back

 

responses to this article

Name
Subject
Comment