Credit Suisse prefers gold as base metals prices due for correction
Credit Suisse warns that base metals markets are becoming increasingly
overheated with a potential price correction looming. The prospects for
gold, however, continue to improve with lower central bank sales, and
reduction of hedgebooks.
Author: Dorothy Kosich
Posted: Monday , 14 May 2007
RENO, NV
While copper prices have increased more than 50%, and nickel and lead
prices by 40% since February, Credit Suisse analysis suggest that "the
risk of a correction in base metals prices has also intensified strongly
against the backdrop of this significant upturn in prices."
Meanwhile, thanks to reduction in global gold hedgebooks and reduced
central bank gold sales, Credit Suisse said gold "remains our preferred
precious metal."
In his weekly report, research analyst Tobias Merath said, "Many markets
look increasingly overheated, and some warning signals are already
emerging indicating that the increase in prices is unsustainable at the
current pace."
"For instance, the copper futures curve has already shifted to a
contango pattern, which points to improving available supply of the
metal," he said.
"Although the longer-term fundamental outlook continues to paint a
positive picture, the risk of a price correction has therefore
intensified at present," Merath said. "Investors who hold long positions
in these markets should consider profit-taking at prevailing price
levels."
Nevertheless, Merath asserted that "more favorable buying opportunities
should re-emerge in the second half of the year. In our view, however,
aluminum still represents a conservative investment, with any future
correction likely having a less pronounced impact on the price of the
base metal."
PRECIOUS METALS OUTLOOK
Merath's analysis determined that reduction of global gold hedge books
by a total of 3.9 million ounces during the first-quarter 2007 "will
likely continue to underpin gold prices-at least in the near term."
Meanwhile, European central banks have sold 11.6 tonnes of gold in the
week ending May 4.
"Year-to-date in this third year of the CBGA (Central Bank Gold
Agreement), overall gold sales have fallen short of the level recorded
in the same previous year's period by 66 tonnes., This constitutes
favorable news for gold prices because the sales carried out by the
European central banks in recent years have provided a reliable source
in the gold market," Credit Suisse noted. "The fact that gold sales are
now lagging considerably behind the previous years' levels will probably
lend additional impetus to gold prices."
"In light of the growing investor interest as well as upbeat data coming
from the physical market, gold remains our preferred precious metal," he
added.
"The fundamental outlook for the platinum market also sketches a
positive picture. In view of the higher volatility and the less
convincing physical market situation-which is marked by supply-side
surpluses-we have taken a somewhat more skeptical stance regarding the
outlook for silver and palladium metals," Merath concluded.