Gold heading for $1,500 before mid-2010- SocGen
The bank suggests buying into the recent commodities correction as it expects precious metals to outperform the rest over six months as investors' fears intensify about inflationary pressures exacerbated by political interference.
Posted: Wednesday , 16 Dec 2009
In its latest quarterly Commodity Review, investment bank Société Générale forecasts continued strength in investor flows into commodities in the first half of 2010, helped by central banks keeping policy rates at extremely low levels. The bank suggests that, not least due to the size of the output gap in the United States, the recently developed fears of an increase in FOMC interest rate policy has been overdone and therefore recommends buying into the latest correction in commodity prices.
The bank's foreign exchange strategists are looking for new lows for the US dollar against the euro during the first half of 2010. This, combined with the persistence of "exceptionally lax" monetary conditions, high investor cash holdings looking for a home and the secular trend of "long-only" fund managers for diversification into commodities as a hedge against inflation as well as mitigating equities exposure, all points to very strong investor flows into commodities during the first half of 2010.
Further out, the dollar is expected to stabilise if not bounce in the latter part of the year as the market starts to focus on the US rate hikes that are expected in early 2011. The US is not the only country that has to contend with a large output gap; the EU and Japan are facing a similar problem and this is likely to delay the start of interest rate rises in general until the start of 2011 - although the major central banks are expected to reverse some of their quantitative easing measures during 2010.
This likely course of interest rates has a dual impact on investor psychology; a) the expectation of rate hikes in 2011 is likely to reduce investor flows into commodities in the second half of 2010, and b) another full year with interest rates at record lows, combined with large structural fiscal deficits in the major OECD countries, will extend ongoing market concerns about potential longer-term inflationary forces.
Add this to the fact that, in SocGen's view, "The market is becoming concerned that the governments of the major OECD countries may put pressure on central banks to keep interest rates low for too long in order to help reduce the huge structural fiscal deficits in real terms (higher inflation would tend to reduce the real fiscal burden)" and we have another recipe for higher exposure to gold.
SocGen therefore expects precious metals prices, led by gold, to rally sharply in the next two quarters and the bank is looking for gold at $1,500 before mid-2010, with the view partly driven by the weight-of-money argument that revolves around gold's relatively small market size by comparison with other asset classes. Other bullish gold drivers include flat mining supply and the expectation for ongoing Asian central bank gold buying.
Asia, most pointedly China, is expected to maintain its spending on infrastructure projects next year and this should underpin base metal prices, with nickel expected to be the outperformer due to lower inventory cover at stainless steel manufacturers. The reverse is true for aluminium, which is labouring under a heavy burden of inventory and structural overcapacity.
The bank is also looking for moderate increases in crude and refined oil prices, aided by a gradual recovery in demand, particularly from Asia combined with restrained supply from OPEC. Global refinery overcapacity will, however, mean that the expected rally in refined products would be likely to stem from the rise in crude per se rather than being driven by strength in any one refined product.
Furthermore a distinctly bearish long-term weather outlook for the US is underpinning the view that US natural gas is likely to outperform the majority of the rest of the energy sector and that the market is not fully discounting the substantial risk of a much colder US winter than normal.
The study, which goes into all these sectors in depth, carries an interesting summary of how its quarterly average price forecasts compare with existing forward prices; the highest premium in terms of these differentials is, on a three month view, natural gas while among the metals gold and silver are in pole position. Looking further out to the fourth quarter of next year silver carries the laurels in the metals sector overall with nickel in the vanguard for the base sector (and outperforming gold), while tin and zinc bring up the rear.