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.
Rhona O'Connell
16 December 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.
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