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Metals in Motion

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Dan Smith
Standard Chartered
[email protected]

Gold is back in favor amid elevated inflation fears: Gold prices trended higher in August and September as central banks in Europe, Japan and the U.S. implemented QE to offset the weak economic backdrop. The U.S. dollar also weakened, which helped to boost the commodities complex. 

Investors also remain keen buyers of gold. Major ETFs are up sharply since the start of August, rising 5.3%. U.S. net speculative positions are up 5% week over week (as of Oct. 8) and 46% month over month as of the latest data from Sept. 18. We expect gold prices to trend higher in the next six months. Investor appetite is likely to remain strong due to problems in Europe, and worries about inflation are elevated. 

Base metals are turning higher, but face some headwinds: Base metal prices have trended higher in recent weeks as markets have reacted to aggressive plans by central banks to pump more money into the economy. However, worries about growth in China and Europe have created some headwinds. 

Copper prices will be followed closely as a leading indicator for the rest of the [period]. For now, most fundamental data supports a mildly bearish view, although excess liquidity should be supportive at the margin. Consumption calculations for China point to a fall in demand in August after a strong year. Spot premia in Shanghai fell 26% in September, and stocks in bonded warehouses have been rising. Our local economists see continued weakness near term. 

Despite this, we are not excessively bearish about China, as the government plans to boost infrastructure spending and demand growth is moderating, rather than collapsing. On a six-month view, we expect copper and base metal prices to trend higher, though we could see further weakness near term given the uncertain macroeconomic backdrop.

Guy LeBas
Janney Montgomery Scott

Gold bugs in the crowd have been quick to talk their own positions in the wake of Ben Bernanke’s all-in speech at Jackson Hole (not to mention in the post-QE3 world). The chrysopoeic metal cleared an all-time nominal high of $1,774 just a few days after the Fed’s move, though inflation-adjusted, we’re still short of the 1980 peak. 

The theory behind the bugs’ argument is that Fed money printing is (a) debasing the value of the dollar relative to a “fixed” object like gold and that (b) the Fed money printing is generating inflation and increasing the value of real assets such as gold. 

While the run up is likely more than just a pyrite rally, there are a range of factors driving demand for gold, some more structural and some more technical than the Fed argument. We cannot, however, ignore the fact that a number of other commodities have also seen substantial price movements since Bernanke turned the taps all the way to the left. 

Basically, with negative real interest rates, real assets become attractively valued at nearly any price—until those negative real rates disappear. Under this expectation, there’s a financial incentive for the U.S. investor base to borrow dollars and plow those funds into commodities on an ongoing basis though at least mid-2015.

Frank Holmes
U.S. Global Investors 

The world’s central bank leaders continue to spike the monetary punch bowl, with investors imbibing on gold once again

As Bank of America-Merrill Lynch says, “monetary policy is contagious.” The Fed’s money printing practice to help create jobs is only one part of the picture. Along with the growing U.S. monetary base, global liquidity has been growing every year for the past 12 years. As you can see, both of these factors have a close correlation to the rise of gold. 

Buying continued in September, with gold lovers loading up on coins. According to Bloomberg, people purchased the most American Eagles from the U.S. Mint in eight months. Almost 70,000 ounces were sold last month—the most sold since January when the U.S. Mint sold 127,000 ounces.

Miners also attracted interest, with the FTSE Gold Mines Index experiencing a rise of 13.25%, and the NYSE Arca Gold Miners Index rising 12% during the month of September alone.

If you factor in only the Fed’s program to purchase mortgages and Treasuries, Bank of America-Merrill Lynch says that over the next nine months gold could go to $2,000, and by the end of 2014, gold could be at $2,400. 

This target doesn’t take the Love Trade into consideration … The rupee’s recent strength has helped to increase Indian gold demand with flows climbing to a five-month high, according to UBS. What’s helped bring shoppers back to the market is the fact that the exchange rate is back to where the rupee was in April. 

Investors now have two strong reasons to invest in gold: the Fear Trade, driven by an expanding monetary base, and the Love Trade, driven by rising gold demand in Chindia. If you’re already sold on gold, make sure to maintain a modest 5 to 10% weighting in gold and gold stocks. J


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