| Sky-high public debt, monetization fear to sustain record gold trading--BMO
As commodities ride the economic global recovery over a sometimes bumpy road, BMO's Bart Melek predicts precious metals will do very well for several years. Author: Dorothy Kosich
Posted: Wednesday , 23 Jun 2010 RENO, NV - BMO Senior Commodities Analyst Bart Melek predicted Tuesday that gold will continue to trade near record levels into 2011. He suggested "sky-high public debt" and fear of monetization are key reasons to buy gold. Meanwhile, Melek also advised that copper, metallurgical coal and iron ore are top BMO research picks among the industrial commodities. GOLD After a very strong performance last year, Melek projects that gold and other precious metals will do very well for the next several years. "The key drivers for the precious metals group are investor concerns over the viability of the Euro and fiat currencies broadly (the competitive currency devaluation concerns and revaluation of the RMB), an eventual move toward a higher inflation environment and massive western world fiscal imbalances, and improvements in jewellery/industrial demand as the world pulls out of recession." The recent jump in the U.S. Dollar and the capital markets turmoil related to Greece's economic crisis and a declining Euro helped gold reach a new record as investors used it as a hedge against risk. "The yellow metal rallied even as the commodity complex fell sharply," Melek noted, "leading BMO to believe that our thesis that gold is excellent protection against market turmoil and that it will remain in place for the foreseeable future is well founded." BMO also suggested, "The expectation that the Fed, the ECB and other central banks will be largely on hold this year and that they are unlikely to boost rates overly aggressively next year are additional factors that are likely to keep gold on a high trajectory." This combined with the facts there is virtually no hedging by gold producer s, and the central banks have become net gold buyers, makes BMO research comfortable with its 2011 price forecast of $1,200/oz. The possible future monetization of the massive public debt obligations issued by the U.S. And European Nation will probably continue to prompt investors to buy gold for protection. Melek also suggested the stronger Chinese yuan is positive for gold as China is likely to slowly revalue its currency over a long period. "Another factor expected to helps prices is physical demand from consumers in developing economies as disposable incomes there grow, fuelling gold purchases as a store of value and status symbol. Bull Case The bull case for gold would see either inflation and growth moving materially higher, or the dollar or Euro moving materially lower, according to BMO. A breakout of a sovereign debt crisis due to elevated deficits in countries such as Greece or Portugal could also send gold soaring. Should any of these scenarios occur, gold may rally to as much as $1,600/oz by 2011, Melek advised. "One should remember that the value of all gold ever mined is only about $6.5 trillion (known as above ground stocks) and that even a modest shirt from the much, much larger fixed income and equity markets into gold (value at well over $125 trillion) would create a severe scarcity and much higher prices," he said. Bear Case In his analysis, Melek suggests "there are credible scenarios that could derail the gold price." "An early and aggressive interest rate hike by the Federal Reserve represents one of the biggest risks to gold prices, as that would lift real interest rates, and increase the opportunity [cost] to hold gold," he advised. "This would also remove two key reasons why investors typically buy gold: inflation and U.S. Dollar worries." SILVER Melek expects silver, platinum and palladium to outperform gold, "as they benefit from being gold-like and their high sensitivity to industrial activation. Expectation of only modest supply growth should also benefit silver and PGM prices." Silver is expected to benefit from its precious metals qualities during a period of continued debt uncertainty in Europe, and also from high industrial usage as manufacturing recovers. Silver ETF holdings indicate that European investors "readily bought precious metals to counterbalance the negative impact of the unfolding Greek sovereign debt crisis on the European currency, which is also positive for the silver price," Melek said. "Strong global industry production recovery, rising jewellery sales the European sovereign debt issues continue to provide bullish support for silver consumption," BMO noted. "Mined silver from primary and secondary sources is being outpaced by demand growth, providing further price support."
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