Monday, January 12, 2009

Commodities in focus: Sector outlook

Gold -- To hold gold or not to hold gold...? That is the question.

Gold is a funny metal in the commodity family. Despite its functional use in areas such as filling cavities, gold is also a very fickle metal in the sense that a variety of other macro-conditions ultimately play a big role in determining the price of gold.

The price of gold has held up reasonably well, remaining in the $800/t oz. Range despite a short dip into the $700's/t oz in October and November. Reasons to favor gold right now come predominantly in the form of using it as a hedge against future depreciation of the US dollar vs. the Euro and other major currencies. With all the money the US Government is printing and spending, plus historically low interest rates, most analysts estimate that the currency will weaken in the coming quarters.

Kitco - 6 month gold spot

On the other side of the equation, demand is falling from major consumers like India. Second, if stock markets do witness a sharp rebound, investors may have reason to turn away from gold and return to stocks which are at historical valuations. Chandrashekhar of the Hindu Business Line, a Indian news site says “In the short-term it could come under pressure amid a deflationary environment or during bouts of dollar strength.”

Base Metals – Copper futures jump 5% limit in Shanghai trading, but outlook still remains dim

Li Rong, chief analyst at Great Wall Futures in Shanghai told Bloomberg (in this article), “Chinese consumers took advantage of lower overseas prices to stock up ahead of the Chinese New Year.”

Chandrashekhar had the following to say about base metals.

In case of copper, market fundamentals, especially the demand side continues to deteriorate. This metal may have the furthest downside potential from current levels. According to experts, copper prices are still above production costs and miners still make money. Therefore, there would likely be cost-related cutbacks in production. On the other hand, aluminum, zinc and nickel prices have all fallen very close to weighted average production costs. There is growing risk that copper could dip near to this level at $2,100/t (click here to access the full article from the Hindu Business Line).

Crude Oil / Energy -- Bounce back?

At the moment the financial crisis and the recent political tensions in the Middle-East and Eurasia (Russia) have created a sense that oil prices may have come too low. Additionally OPEC has just announced large production cuts will be hitting the markets in the coming months to bolster oil prices.

When the global crisis appears to have been brought under control and demand returns to markets, the price of a barrel of crude may well spike back above $50 a barrel. Further dollar deterioration and escalation of political tensions may also contribute to higher prices.