Commodity Focus

Gold to reach $1,500 before end-H 2010 as fund, official investors diversify - SocGen

December 15, 2009

By: Melanie Burton

London, 15 December 2009 - Société Générale expects gold to soar to $1,500 per ounce before the middle of next year as fund and official sector investors diversify into the safe-haven metal to hedge against inflation and fiscal dislocation, it said on Tuesday.

The French investment bank expects gold to average $1,388 per ounce next year, up from $969 this year. Gold was last quoted at $1,114.60/1,115.40 per ounce, down 9.2 percent from its record high of $1,226.70 per ounce in early December.

"The potential for currency dislocations as quantitative easing programmes are wound down at different rates has... been a primary fear among investors, as has, following the problems in Dubai, the concern over the financial sector," SocGen said.

"Consequently, we expect precious metal prices, led by gold, to rally sharply during the next two quarters, outperforming other commodity categories," it said.

Gold is a relatively small market compared with equity and bond markets so even small allocations by global fund mangers have the potential to lift prices dramatically. As an alternative currency that cannot be debased by printing, gold has become increasingly attractive to investors since the onset of the credit crunch nearly 15 months ago.

Meanwhile, continuing purchases by Asian central banks and flat mining supply have added to the bullish picture.

In recent months, sentiment towards gold has been bolstered by two major events: first, India's purchase of International Monetary Fund gold and, second, news that leading US investor John Paulson will introduce a gold fund at the start of 2010, including $250 million of his own investment, SocGen noted.

Less bullish was news that Barrick Gold Corp closed its hedge book, contributing a massive 168 tonnes of demand from the end of June to the start of December; this may have been a main driver of gold's move to record prices. Producers have bought back their hedges in recent years to gain exposure to the gold price.

REVERSAL TRIGGERED BY FISCAL FEARS OVERDONE

The current sell-off, however, triggered by market concerns that US fiscal authorities may raise interest rates as the economy improves next year, has been overdone, SocGen said.

Very low interest rates in the US, the eurozone and Japan should continue throughout 2010 and provide strong support for gold during the first half of next year - the metal is increasingly being bought as a hedge against long-term inflation risks.

Meanwhile, there have been good indications that buyers in some part of the world are not only becoming accustomed to higher prices but are also expecting further gains, SocGen said, highlighting India. Weak-handed holders of gold have mostly been flushed out, suggesting that scrap supply may moderate.

One trading opportunity would be to buy an optimised six-month gold call spread that would generate on a 20-percent rally in the gold price a gross profit of five times the premium paid, SocGen suggested.

SocGen also expects silver to average $21.83 next year, up 48.7 percent from $14.68 this year as the metal is carried along in gold's slipstream. It was last quoted at $17.13 per ounce.

"Sustained high prices for gold will help to keep silver buoyant as part of the precious metals complex, while restocking and the proliferation of new industrial uses will help to tighten the market's fundamental balance," it said.

Signs of revival are evident in industrial demand for the metal, especially in the US. After a heavy run-down of inventory during the early part of 2009, consumers have been living on a hand-to-mouth basis and rebuilding of stocks may be about to take place despite elevated prices.

Still, investors remain ambivalent towards the metal, with heavy buying on silver's break of $18 per ounce and light profit-taking from the US ETF when prices pierced $19 per ounce earlier this month.

PALLADIUM SEEN IN DEFICIT AS RUSSIA STOCKS DEPLETE

Platinum and palladium prices have scope to climb higher - markets have not yet fully priced in a pick-up in the global automotive sector, while decreasing sales from Russian stockpiles will push the palladium market into deficit this year.

SocGen expects palladium to climb 55 percent to average $408 next year from $264 this year, while it sees platinum rising 28.7 percent to $1,565 next year from $1,216 this year. Palladium was last quoted at $357 per ounce, while platinum was last at $1,434.

"After a torrid time in 2008 and the first half of 2009, the automotive industry is looking much more robust in the final quarter of the year than the markets had previously expected and this has been supporting both metals," SocGen said.

By the end of this year, world palladium inventories will have dropped by around 10.7 million ounces since 1998, a key stimulant for investment demand.

The market will continue to sustain a global deficit, while Russian state material remains the wildcard. Heavy sales from Russian stockpiles are the norm over December and January and may depress prices for these months, SocGen warned.

Meanwhile, in platinum, mine supply from power-constrained South Africa may still be under threat, with miners operating on the margins of profitability, while state power utility Eskom seeks a tariff increase of 35 percent this year.

The remarkable strength of Chinese jewellery demand - set to reach second-highest level on record this year - has kept the metal afloat. Platinum is expected to register a very small surplus next year.

These articles are provided for informational purposes only and were obtained from publicity available sources on the Internet. These articles do not constitute financial advise or trading recommendations by Global Asset Management ("Global"). Global neither warrants the accuracy or completeness of the information contained in these articles, undertakes to update them, nor is it responsible for any omission or error contained in these articles. Viewers are encouraged to conduct, and should only rely on, their own independent research.
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