Dollar weakness and US deficit will underpin gold price. Potash, oil and uranium also positive - Scotiabank

Scotiabank economist Patricia Mohr forecasts that commodity prices will decline further this month, but also suggests a number of commodities should outperform.

RENO, NV - 

As gold well maintained its value at $839/oz in mid-December, Scotiabank economist Patricia Mohr predicted Monday that renewed U.S. dollar weakness, linked to a spiraling US$1.25 trillion U.S. budgetary deficit, will underpin gold prices.

Mohr forecast that "a number of commodities should outperform-gold-a hedge in uncertain economic times'-potash (still at record highs)-and oil & uranium, if investors are prepared to take a two-year view."

She also predicted that, within base metals, copper will continue to outperform, while spot uranium prices will rebound to US$70 per pound.

In her research, Mohr noted that LME zinc prices have fallen close to average world cash costs due to a collapse in demand in the global auto and construction sectors, "while 50% of the world's aluminum smelters are not covering cash costs."

"The shift from ‘boom' to ‘bust' in many commodities has been the most rapid in the history of the Scotiabank Commodity Price Index (in data back to 1972-magnified by the exit of hedge and investment funds from commodity markets investments as well as a rapid markdown in anticipated global growth from 5% in 2005-07 to only 1.55 for 2009," she said.

Mohr advised that commodity prices will decline further this month, "ending 2008 well below year-ago levels 9-12.8% as of November)."

For instance, uncovered U₃0₈ requirements by North American utilities will be low in 2009, "given the restocking and term-contracting of recent years," she said. "However, India will return as an importer of uranium concentrates in 2009 and has now signed bilateral nuclear cooperation agreements within the United States, France and Russia and may do so with Kazakhstan in January."

She advised that spot uranium prices should rebound to the US$70 level over the medium-term due to delays in the Cigar Lake start-up and the Olympic Dam expansion.

Potash prices remain at record highs, Mohr noted. "Despite prospects for very slow sales in early 2009, it appears that the major Russian and Canadian producers are committed to keeping prices high by managing supplies, rather than discounting prices sharply to boost shipments (in keeping with past price). Canada's largest producer will reduce production by 20% in early 2009."

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