Gold could hit $1,600/oz but silver, pgms will likely outperform
BMO Capital Markets Bart Melek says commodity prices are riding the global recovery wave with copper, platinum, silver met coal, and iron ore as his top picks.
Author: Dorothy Kosich
Posted: Friday , 23 Apr 2010
RENO, NV -
Under the right circumstances, BMO Capital Markets' Bart Melek says gold could rally as high as $1,600 per ounce by 2011.
In analysis published Thursday, Melek said, "Silver, platinum and palladium are expected to outperform gold, benefiting from their quasi-money properties and high use in industrial applications."
"Gold is projected to strengthen modestly, buoyed by long-term inflation concerns, sovereign debt, the U.S. dollar, fiat currencies generally and the expectation that the Fed will not raise rates aggressively," he said.
Melek also anticipates that industrial commodities will perform well into 2011. "Considerable risks associated with the U.S. dollar and other developed world currencies due to rising fiscal imbalances, supply concerns, and growing interest in commodities as a bona fide asset class and a hedge are additional factors driving the BMO view."
"These are the same reasons that BMO believes will keep gold strong and make other precious metals star performers," he added.
Among industry commodities, copper, metallurgical coal and iron ore remain the top BMO Research picks for 2010. Melek explained that tight supplies and producer restocking are supportive of BMO's bullish outlook for industrial commodities. "It is likely that demand for copper and other metals and bulks (iron ore, metallurgical coal) will move higher due to increased global industrial (U.S., Europe and Japan) production activity and the restarting of shuttered steel smelting capacity."
"Western world stimulus-related capital project expenditures are additional factors prompting us to see these commodities as top performers as is the limited downside," Melek said. "These factors along with relatively low inventories held by manufacturers, wholesalers and retailers should prompt stronger consumption and restocking in the near term."
PRECIOUS METALS SUPPORTED BY DEMAND
Following a strong performance so far this year, Melek advised that gold and other precious metals will do very well over the next several years.
BMO says the key drivers for the precious metals are:
--strong investor interest due to relatively poor long-term U.S. dollar outlook,
--competitive currency devaluation concerns,
--an eventual move toward a higher inflation environment, and
--improvements in jewelry and industrial demand, as the world pulls out of recession.
In his analysis, Melek said, "Silver, platinum and palladium are expected to outperform gold, as they benefits both from their quasi-money status and the sharp rise in demand associated with the rebounding in manufacturing across the world."
"Expectations of only modest supply growth should also benefit silver and PGM prices," he advised.
GOLD
U.S. dollar concerns justify gold prices near $1,200/oz, Melek asserted.
"Gold will likely keep firm into 2010 and 2011, trending near $1,200/oz, all thanks to long-term concerns surrounding the greenback and fiat currencies generally, record-setting U.S. fiscal deficits, rising inflation concerns and higher jewelry demand (which has been greatly affected by the recession," he forecast. "The expectation that the U.S. economic performance will be firm into 2011 and the Federal Reserve on hold for most of 2010, with only modest tightening thereafter, will likely keep gold on a high trajectory."
"All this combined with the fact that there is virtually no hedging being done by the gold producers and that the official sector has become a meaningful net buyer for the first time in more than 20 years, make BMO research quite comfortable with the $1,200/oz price forecast by 2011," Melek said.
BMO's research suggests, "Spiraling deficits, ballooning government debts, and risk of eventual monetization are all supportive of gold."
"Gold should also benefit from the weaker U.S. dollar over the long term."
In a process that already seems to be starting, central banks could put more gold into their reserves in order to diversify their forex holdings," Melek suggests. Meanwhile, investors anticipated only a modest negative impact on the gold price when the IMF sells the rest of the 400 tonnes it has decided to liquidate.
SILVER
Melek advises that, despite a silver price drop to $18.75 per ounce due to weakness in the first quarter, "the remainder of the year looks shiny."
"Silver is expected to continue to benefit from the improved global economic environment, recovering industrial usage, and its gold-like qualities, which make physical silver a hedge against inflation and a currency risk," he predicted.
Melek also noted that mined silver from primary and secondary sources is being outpaced by demand growth, providing more price support.
"BMO forecasts silver to average US$18.75/oz in 2010, down from the previous estimate of US$20.00/oz. The forecast was lowered as a result of the price pressure experienced during the first quarter. However, BMO expects silver to appreciate during the remainder of the year, amid muted supply growth and increased industrial demand."
Meanwhile, BMO forecasts an average palladium price of US$492/oz, "which leaves room for further price appreciation.'
"Investment demand will also play a part in the fortunes of the metal," Melek said. "Physical holdings of a newly listed palladium backed ETF have reached nearly 550,000 ounces since its launch at the beginning of January."
INDUSTRIAL METALS
BMO projects copper prices to average $3.44 per pound this year and $3.70/lb in 2011. An anticipated copper deficit in 2011 "will limit any correction," Melek advised.
"More investor capital is likely to find its way into the copper space into 2011, helping to support the commodity price and copper-based equity valuations, especially those with high EPS sensitivities to the underlying."
In his research, Melek found "very bullish price indicators for iron ore."
"Iron ore in lumps and pellet form are forecast to outperform fines," he advised. "Restarts in the western world are set to tighten these markets materially, as European and American smelters are more dependent on pellets and lumps in their operations."
‘Record Chinese iron ore imports and introduction of spot pricing mechanism are bullish price indictors," Melek added.
Similar to iron ore, BMO says the international met coal market continues to remain "quite tight, with even lower grades of met coal apparently in a shortage situation."
In the meantime, Melek forecast a limit to the side with a possible correction. The zinc price could trail other metals, while a significant inventory build-up clears and as western manufacturers increase capacity utilization.
"The long-term price outlook, however, remains positive," he predicts.
Meanwhile, the molybdenum price should continue to be positive due to the improved demand for stainless steel and steel products for most of this year, BMO advises, with a research forecast of 2010 upgraded to an average annual price of US$16.82 per pound.
BMO suggests nickel is in rally mode with a potential price peak of $13/lb as restocking and smelter rates accelerate in response to the global economic recovery. It appears that what Melek called "hand-to-mouth" nickel consumption may be at its tail end as restocking is gaining momentum.
As new supplies of uranium are growing substantially, BMO forecasts a third wave of uranium production expansion over the medium term as projects progress. BMO Research predicts an average 2010 uranium spot price of $45/lb with a long-term price of $50/lb beginning next year.
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