'US economy could be one of the big surprises in H2' 2011 - SocGen
Although SocGen takes a relatively sanguine view of the prospects for the global economy it nonetheless remains friendly towards gold and silver given the investment markets' frame of mind
Author: Rhona O'Connell
Posted: Thursday , 23 Jun 2011
In its latest Quarterly Commodities Review, Société Générale takes the view that , at a "time of significant doubt for the outlook for the global economy" the recovery is sustainable and the bank is looking for a stronger second half-year. Headwinds persist, however, and the recovery in the advanced economies is likely to remain relatively sluggish. SocGen believes, though, that it will be possible to engineer a successful landing of the emerging economies (notably China), that should allow the recovery in the advanced economies to remain stable.
The Bank has built the "Equally-Weighted Risk Contribution" model, which allocates funds based on variance and co variance, in order to create a portfolio in which the risk contribution of each asset is the same.These portfolios, SocGen suggests, are "particularly suitable to volatile markets and well diversified when used within the same asset class". Balanced according to the bank's expectations for the four commodity subsectors, the current weighting favours the precious metals, followed by agriculture & livestock, base metals and then energy.
The nature of the current economic cycle, with different nations at different positions, leads SocGen to expect substantial asymmetries in policy setting. The bank believes that the recent soft patch in the United States will be transitory and that the reacceleration in the US economy could be one of the big surprises in the second half of this year. The bank is looking also for a bumpy landing in China, continued bifurcation in Europe and a V-shaped recovery in Japan.
All of these features, along with existing potential inflationary forces, are likely to continue to boost gold despite the fact that the fundamental market surplus this year will be a hefty one.Gold's primary drivers are identified as sustained inflationary fears, market concerns (well-founded or otherwise) over economic growth and the associated impact on the relative stability of major fiat currencies; furthermore, there are still some lingering fears that the US may need to come up with further stimulus, although this does not appear to be a view that the bank shares (and nor, at the moment, does the Fed).
The Review was published just prior to the latest meeting of the Federal Open Market Committee (FOMC), the subsequent Statement from which noted that the "economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had anticipated" and that recent labour markets had also fallen short of expectations. The Committee argues that this slower pace is partly a function of temporary factors including the constraint on consumer purchasing power brought about by higher food and energy prices, along with supply chain disruptions due to the tragic events in Japan. The FOMC also states that while inflation has picked up in recent months (commodities and imports +supply chain disruptions) "longer-term inflation expectations have remained stable"; in his press conference, Chairman Bernanke said that he was expecting the economy to pick up in the second half of this year. The bond market rally ran out of steam in reaction to the FOMC statement with its lack of indications of QE3, while gold also came off on market expectations that there might be no further easing (and weak Eurozone data that benefited the dollar).
The FOMC therefore left rates on hold with the target for fed funds at 0.25%, and, following the end of QE2 next week, will "maintain its existing policy of reinvesting principal payments from its securities holdings" and pay close attention to inflation and will adjust its securities holdings as appropriate.
SocGen is looking for continued prices rises in gold (and, to a lesser extent silver, which is lying doggo after its recent tumble - something that had been forecast by SocGen and others) although this is to some extent a dollar issue; when considered in other major currencies SocGen is expecting gold to improve, but to a lesser extent than in dollar terms. The bank points out, for example, that gold has been moving sideways in Swiss franc terms for most of the first half of this year already.
SocGen is looking for a surplus of roughly 600 tonnes of gold both this year and next. These are big numbers, but the bank expects improvements in price in the latter months of the year .The primary drivers are the traditional seasonal reasons, dollar fears and persistent or resurgent inflationary fears. In the short term the bank expects gold to be in thrall to currency movements as investors sit on their hands awaiting more clarity on relative fiscal policies on either side of the Atlantic. SocGen argues that even without a QE3, the amount of money in the financial system, along with fresh commodity strength, is likely to bolster investment activity. This would have a further deleterious effect on jewellery demand, although scrap return might need much higher prices if it is to jump again. SocGen foresees gold challenging $1700 later this year and $1,800 in H1 2012.
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