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October 24, 2012 at 08:00 PM
Dan Smith
Standard Chartered
+44-20-7885-5563
[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
215-665-6000
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.
