Indication from BT on future of metal pricing,
Gold
The yellow metal has had a good run, having posted nine consecutive years of higher average annual prices.
An investor-led surge in demand in last year, triggered by weakness in the greenback, saw gold prices break decisively above the long-held resistance level of US$1,000 per ounce to reach fresh records in closing months of 2009.
Physically backed gold exchange-traded funds are now worth a record US$70 billion, while a new Central Bank Gold Agreement has come into force as central bankers' gold appetite appear insatiable.
A key risk though is the unwinding of the massive short US dollar/long gold position, when the market has greater certainty on the timing of a turn in the interest rate cycle in the US, widely expected in the second half of next year.
'We are now soft-peddling on our price stance as gold starts to face headwinds of an end to the gifting season and a stronger trade-weighted US dollar,' said Nick Moore, who heads the commodities team at RBS. 'By 2013, we see gold averaging a record US$1,300 per ounce.'
'Gold is money - a very special form of money. It is gold's monetary function that drives its price beyond its relative value as a commodity . . . Applying a valuation to gold is tricky. There is no absolute independent measure that determines when gold is cheap, expensive or fairly valued.'
Based on production costs, gold is not cheap, says the report. But compared to other assets such as oil or stocks, 'gold appears to be at least fairly valued if not inexpensive'. The stock-to-gold ratio is one yardstick that is often cited, for instance. In 1900, the ratio was two - that is, it took two ounces of gold to buy the whole Dow Jones Index. It remained below five for the next 25 years, and then shot up to 15 during the market boom of the 1920s.
With the US in recession in 1980, that ratio fell to one. It picked up speed in 1990s and during the technology bubble, was an astonishing 35. Since then the ratio has been falling to its current level of about eight. Given that the long term average price of the Dow Jones Index is 5 ounces, gold is still somewhat cheap compared to stocks, which is the same as saying that stocks are still somewhat expensive compared to gold.
The target of gold price is about US$1,500 per ounce in 12 months time. Of course, any sharp intensification of the sovereign debt crisis in Europe could propel the gold price even higher, but the downside risks should not be discarded lightly either. Any dip below US$1,200 is a buy. We would expect investors to be richly compensated for the risk they take.
UBS' report also advises investors on their approach to gold. Investors, it says, should be clear about why they want to invest in gold. There are typically four considerations - portfolio diversification; thematic exposure through structured notes; yield enhancement using options; and opportunistic trading. Those objectives will exist alongside varying investment horizons.
It favours direct investments in gold rather than mining shares. A higher gold price may not have a strong impact on a company's share price. Shares are also affected by the broader market, as witnessed in the steep drop of mining shares in 2008.
In a portfolio, it does not advise allocations of more than 10-15 per cent in the long term. 'Even though the correlation with equities is rather low, especially in difficult investment environments, gold fails to deliver adequate returns over a multi-decade investment horizon. An allocation of more than 10-15 per cent harms the historical risk/return profile of a balanced US dollar portfolio.'
There are of course, risks to gold. High real interest rates, for instance, could trigger outflows out of gold and a fall in price, it says. For now the likelihood of this is believed to be low, given a still fragile economic backdrop.
In Singapore, buying physical gold incurs GST.
Silver
Traditionally, silver is the weakest of the precious metals and the most vulnerable to investor fatigue. But the precious metal is a geared play on gold and investor appetite remains strong.
Indeed, buoyant exchange-traded fund activity has just about absorbed 2009's large surplus but sizeable surpluses could persist in 2010-11 despite a rebound in industrial demand.
RBS forecasts that silver will spend long spells below US$17/oz in 2010-11, but will then move back above US$20/oz in 2012.
Copper
With the exception of lead, copper has been the best performing metal in 2009, by a large margin. Last year, London Metal Exchange cash prices rose by about 130 per cent in the US dollar, reflecting the impact of aggressive Chinese restocking in the first half of 2009, relatively low inventory levels, scrap tightness and a limited amount of idled capacity.
Morgan Stanley thinks that these factors could continue to drive prices again this year. Indeed, Chinese 'indigestion' from excess imports should subside this year, even as global growth prospects continue to recover.
In such an environment, the elements of any renewed price strength in 2010 will be the persistence of tightness in the scrap market, especially in China, resulting in upward pressure on demand for primary feedstock. Concentrate supply, in turn, is also expected to struggle in the face of the long-term trend of falling head grades and the impact of rising labour militancy in a number of key copper regions.
A forecast shortfall in refined supply in the face of improved demand for refined copper in the OECD and strong growth in China is, in turn, expected to put renewed downward pressure on the stock-to-usage ratio and upward pressure on price.
Platinum
In a year when gross auto sector platinum purchases have fallen by almost a third as a result of the Great Recession, it is remarkable that total demand for platinum is likely to be down only 4-5 per cent owing to strong growth in Chinese jewellery demand, essentially for restocking and further stock building.
Last year's spike of over 80 per cent in the US dollar price means that jewellery demand could be eroded in 2010 in this very price-sensitive sector.
Although some recovery in consumer purchasing of platinum jewellery is expected with an improvement in economic growth, analysts do not expect to see a repeat of the inventory-driven surge in Chinese demand either in that country or elsewhere.
The small surplus in the 2009 supply-demand balance should turn into a deficit on higher industrial demand and a higher base in jewellery demand.
Looks like the highs of 2008 are unlikely to be repeated.
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