Commodity Blog

Commodity Forecasts

Gold was a stellar performer in 2010 and traders entered 2011 extremely bullish on gold. Some experts were talking about $3,000 and even $5,000 per troy ounce. Indeed, the metal reached a new record high last year, even though it wasn’t gaining as fast as most optimistic forecasters predicted. Yet the end of 2011 left market participants disappointed as gold dropped sharply and had hard time recovering from the loss. Many traders wonder: is there any reason to remain bullish on the precious metal?

The short answer is “yes”. The long answer: most market analysts name a several reasons to be optimistic about gold, but they remain more cautious than at the beginning of the last year. They name several reasons to be bullish on gold: attempts of developed nations to devaluate their currencies and physical demand from Asia. The United States is perhaps the major contributor to optimism for the precious metal as its low interest rates and a possible next round of quantitative easing add to inflationary pressure to the upside for gold. Central banks across the world also stepped in, boosting their gold reserves to diversify from the US currency.

What about downside factors for gold? There is one most important threat for the commodity: Europe. It may look strange at first as the European debt crisis should add to safe-haven attractiveness of gold, but one needs just to recall 2008, when all commodities were tumbling, even precious metals. A serious crisis can be negative for gold and the problems of Europe look serious enough.

Mark Leibovit, editor of the VRTrader newsletter, said in December:

We might hit bottom in a month or so. How far it might go depends on how the technicals unfold. Short-term it’s held the September lows of $1,531. But we have to see it perform in both time and price to confirm it. What might it take do so? We’d need to see the equity market improve, Europe improve, and maybe a QE3.

That outlines the major factors for gold. In case the Federal Reserve would embark on a new round of easing and Europe would emerge from its crisis relatively unscathed, the precious metal will jump to new records. Consequently, gold is in danger in scenario where the USA would recover without additional stimulus, while the eurozone woes would strengthen. If anything, such scenario would boost the dollar, hitting prices for all commodities, gold included. Unfortunately for gold bulls, such scenario is quite possible as America shows signs of recovery, reducing need for stimulus, while European politicians lack courage to make bold moves for saving the European Union from its credit crunch.

Most analysts remain optimistic for gold, though less bold in promising new records. They believe that the metal will reach $2,000 per ounce in 2012, but it won’t move in a straight line and strong corrections can be expected. The worst case scenario may push gold to $1,270, but it’s not likely to go lower, at least not in 2012. In fact, forecasters thought that gold would be weak at the beginning of this year, but for now the precious metal proves to be more resilient than it was given credit for.

Crude oil prices started a rally on August 2010 and were rising till May 2011, when the rally has failed. Since then the prices were extremely volatile as market sentiment shifted, making traders unsure about future performance of the commodity.

In the short-term, the drive for oil should be the same as for other commodities: Europe and its debt crisis. The persisting problems of the European Union have a negative impact on oil and will likely continue to do so for some time. Market sentiment improved by the end of the week, but, unless some major positive event would occur, it’s not likely traders would retain optimism for long.

In the longer-term, the situation in Middle East and North Africa adds its influence to that of Europe. The ongoing political turmoil should prove positive for oil prices as it’s threatening supply. Libya draws special attention of market participants as it may put downward pressure as its output recovers, but may also drive the prices higher in case the country fails to sufficiently increase production.

US Energy Information Administration estimated that the global consumption of oil will grow from its record-high level of 87.1 million barrels per day in 2010 to 88.2 million barrels per day in 2011 and 89.6 million barrels per day in 2012. The non-OPEC output will rise by 0.4 million barrels per day in 2011 and 1.1 million barrels per day in 2012, while OPEC production will remain largely flat, according to the estimates of the EIA.

The EIA revised its price outlook for the WTI crude oil slightly up to the average of $100 per barrel in 2011 and 2012. Traders should be cautious as volatility remains extremely strong and fundamentals currently aren’t particularly supportive for crude.

The recent impressive surge of silver price and the no-less impressive slump left traders puzzled and unsure about the future of the white metal. Some people even began talking about “bubble”. Was it really a bubble or just a violent correction?

The current trend of silver doesn’t look like a real bubble. Yes, the drop was huge, but the rally before it was even greater. A strong correction is completely normal after a long one-side move. Besides, the end of the rally coincided with the increase of margin requirements on COMEX that occurred in untimely moment and turned a minor correction into a massive sell-off.

The decline has stopped and the price has found its floor, it seems. The question is where silver will go now? Fundamentals favor a move to the upside as the global uncertainty and economic instability continue to draw investors to precious metals. It can be easily demonstrated by looking at gold.

But is it a right time to buy silver? Not necessarily. Just remember that summer is not the best season for precious metals. As the saying goes: “Sell in May and go away”. Will this summer be the same? Analysts have different opinions on this point, but most remain bullish. John Embry, the chief investment strategist at Sprott Asset Management, said in his interview to Mineweb that the investment demand for precious metals isn’t seasonal and that the correction of silver prices is largely over. He predicts that silver may even post a new record this year:

Now you are re-establishing a new base and I would be surprised if we don’t take out that high that we saw recently before the end of the year.

In summary, the talks about “silver bubble” look unfounded. Yes, it’s hard to tell when it is better to buy silver – now or in the middle or the end of summer. But what can be said for sure: to be bearish on silver under the current economic conditions is mostly unwise, to say the least.

Platinum was underperforming compared to gold and silver until recently, rallying less than these precious metals in April. That turned out to be an unexpected advantage as weaker rally led to smaller drop, at least compared to silver. But now the metal looks trendless and it’ll be important to see at the driving forces of its moves to understand its potential performance.

For a start, let’s look at the difference of gold and platinum in relation to markets. Gold is a precious metal, its main value comes from investors, not physical demand, and therefore the yellow metal is driven by speculative demand and market sentiment. Platinum is viewed as generally industrial metal and is driven by industrial demand and other fundamentals. Thus, we can expect platinum-to-gold ratio to decrease over time as fundamentals, particularly outlook for the global recovery, can change drastically and currently not very positive for platinum. On the contrary, the demand for safer assets, including gold, remains in place. It can weaken and strengthen, but current economic environment doesn’t let us believe that speculative demand will go away anytime soon. That’s not necessary bad for platinum as it’s also often helped by the demand for safety, just not as much as gold.

Outlook for supply and demand varies among analysts. GFMS in its Platinum & Palladium Survey 2011, cited by Mineweb, predict that increase of supply will outpace growth of demand. ResourceInvestor said that platinum production growth in 2010 was 0.6 percent, while consumption surged 16 percent, and thought that disparity can even wide this year as production in South Africa may stall because of miners’ strikes and underinvestment.

Another important thing to consider is the usage of the metal in automobile industry. This factor currently is negative for platinum as the slowing US economy, problems in the European Union and, particularly, consequences of the natural disaster in Japan don’t make good for the car production and demand. Oil prices also affect this industry as higher prices decrease usage of cars. The recent spike of prices was negative for the platinum, yet falling oil isn’t necessary good for the metal as the oil drops often on poor macroeconomic fundamentals, which are also bad for platinum.

Now, after reviewing factors influencing platinum, can we predict future performance of the commodity? On the longer run, most economists agree, platinum looks attractive. The global recovery should help the demand from automobile industry, while turbulence of the world economy should support speculative demand. GFMS, even being skeptical for platinum demand in the near future, expect the metal to reach $1,900 by the end of this year. In the short-term, though, outlook remains clouded. Currently, the metal trades in a range between $1,745 and $1,800. If prices would manage to break any of these levels and stay outside the range for some time, we can expect significant move at the direction of a breakout. For now, it’s better to step aside from the metal and wait until the picture clears out and prices will establish a noticeable trend.

Suki Cooper of Barclays Capital explains here analysis and forecast for the average price of gold for 2011 in this video. The main bullish driving factor for the commodity is seen in the physical gold market and its still rising popularity. A peak in gold prices will be probably indicated by the ETF market pullback. Gold is still attractive in a short-term perspective.

Soybeans showed a strong rally in the previous year and in January, which has stalled recently. It looks like the commodity ran ahead of itself. Soybeans, as well as soybean meal and soybean oil, may advance in the next month, though.

There are some concerns regarding soybeans and soybeans meals as the high prices may curb demand. The Oil Crops Outlook by the United States Department of Agriculture supported the outlook for lower demand. Soybean crushing decreased by 2 million bushels to 153.1 million bushels in December. The US exports of soybean meal dropped 1.9 million short tons as of February 3 from a year earlier. Crops in Argentina may be boosted by rains, but the harvest will be likely smaller because of the previous drought. The lower supplies from Argentina will be easily offset by output from Brazil and Paraguay.

Soybean oil is excluded from this negative trend, even though the prices for the commodity are high. In fact forecasts suggest that the price for soybean oil may reach the record average monthly level. The USDA raised its 2010/11 forecast for this month by 100 million pounds to 2.8 billion. China is the biggest buyer, purchasing 38 percent of the US soybean oil.

Despite the not encouraging outlook for the demand, the World Agricultural Supply and Demand Estimates predict an increase of the prices for the soybean group of commodities. The soybean price range for 2010/11 is projected at $11.20 to $12.20 per bushel, the soybean oil prices are forecast at $0.51 to $0.55 per pound and the soybean meal prices are forecast at $340 to $380 per short ton.

Previous year was very positive for commodities, including copper. In fact, by the end of the year copper managed to rally even during times when all other commodities were losing strength. This trend has changed recently as copper joined slump of metals and other assets in face of the US dollar’s rally. Is this a beginning of long way down for copper or this is just a small correction before another jump to records?

The same fundamentals that have helped copper to rally in the previous year should bolster the metal in 2011. As global economy gradually recovers, so does demand for copper. According to the International Copper Study Group, world consumption of the industrial metal rose 8 percent in the first three quarters of 2010, while mine production increased just 0.8 percent and refined production grew 5 percent. Exhaustion of copper mines reduces mine output, while technical problems and political tensions curb refined production. As for demand, China remains the major consumer of the metal and its economy continues to show an impressive growth, spurring demand for copper.

Despite all the good signs, there are some reasons for concern. As Dian L. Chu (Chartered Economist) suggested, China’s tightening measures may cause decline of demand for copper. Besides, there’s a speculation that Chinese copper inventories are much larger than estimated. It’s believed that huge amounts of the metal simply aren’t reported. China’s demand isn’t the only reason to worry as any noticeable slowdown of economic recovery, be it because of Europe’s debt crisis or because of any other various reasons, may hurt demand for copper badly.

Even considering all possible problems, most economists remain very bullish on copper. The Goldman Sachs promises that the metal will rise to $11,000 per metric ton this year. Copper Investing News provides several forecasts, some more cautious, promising $10,000 as a target, yet Francisco Blanch, head of Global Commodities Research at Bank of America Merrill Lynch, predict $11,250 as a possible price in 2011.

Gold showed an impressive rally in 2010, but by the end of the year the precious metal experienced several drops, causing concerns that the rally is faltering. Is this just a temporary breather before another jump to records or gold started a way down?

The fundamentals as well as the sentiment look favorable for the metal. The experts from the International Business Times and the Mineweb name such favorable factors for gold: the quantitative easing of the Federal Reserve, the debt crisis in Europe, which forces the European Central Bank stimulate the economy of the European Union, general debasing of currencies by governments of different countries and worldwide uncertainty about global recovery – all this makes gold a very attractive asset to hold as a safe haven. As more and more investors flock to gold new problem arises: the lack of supplies. The old mines are drying out and the new ones aren’t going to be opened in sufficient quantities as there are no resources and technologies to quickly find the new gold deposits. And a growing demand from Asian countries, primarily from India and China, puts additional strain of dwindling supplies.

Despite all the favorable factors gold’s rally stalled recently. One of the reasons for weaker performance of the precious metal was a stronger dollar. The fact that gold is priced in dollars on markets and the recent rally of the greenback held gold prices from going much higher. Another reason for gold possibly being weaker is its current high price, which may drive investors away. Bears, as said on the Economist, also point out that the economic situation in the world should stabilize and the gold bubble will burst as the demand for the metal is mainly speculative and there isn’t nearly enough physical demand to justify such “outrageous” prices. Besides, there’s just no profit in keeping the metal as it’s not bringing interest, dividend, rent or some other form of income by itself like some other assets. On the contrary, safekeeping of gold incurs additional costs.

So, if you’re expecting improvement of the global economy you can start selling gold. But most economists wouldn’t approve such course of action. While such forecast as gold climbing to $5,000 aren’t widespread nowadays, more moderate forecasts, as outlined on the Morgan Gold, still promise gold to advance to $1,500 in the first half of the next year and rise to $2,000 by the end of 2011. Of course, corrections may be expected, especially if the interest rates would start rising, making other types of assets more attractive. Gold prices through the year may decline to $1,315 or even as low as $1,265.

Gold continues to rally and constantly shows new records. It looked until recently like nothing can stop it. But recent decline caused concern and question: will the rally persist?

Most economists, unsurprisingly, remain in bulls’ camp. Reasons they give for continuation of the rally are varied, but most commonly stated reason is uncertainty in the global economy. European debt crisis shook Europe, then attention turned to the weak US economy, now Europe’s troubles again has come to light. Amid such economic turbulence gold is one of the most obvious and reliable safe asset. Many analysts talk about returning of gold to its old role of global currency. Robert Zoellick, the World Bank President, actually offered to return to a gold standard. He proposed a system, which would “consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values”. He wasn’t supported by global policymakers, though, as gold supplies are too unpredictable to make the global economy dependent on them. Jean-Claude Trichet, the European Central Bank President, said that he heard such suggestions since 1980-s, while German officials agreed that paper currencies have its own problems, but considered the system “based on a commodity whose availability is dictated by natural conditions” unpractical in the modern economy.

There is much less people who expect gold to decline, but they exist. They consider the notion of gold as currency in twenty-first century as nonsense, the outlook that is shared, it seems, by global policy makers with their cold reception of a proposal of a gold standard. They also envision current record high prices as unsustainable and predict them to decline somewhere in the future. The problem with such prediction is that nobody dares to tell exactly when and how low the precious metal may fall. This fact makes such predictions almost worthless: it’s not hard to predict that gold will decline, at least slightly, some day, but without exact numbers such predictions aren’t interesting.

There’s an explanation of a decline in October and a possible hint to further gold moves: seasonality. That’s it: gold’s recent behavior hasn’t contradicted the historical pattern, but rather confirmed it. We could expect a reverse of the bullish trend in case prices would continue to decline in November, but gold has resumed its rally. Now we can expect it to continue its rise as season of holidays with New Year, Christmas, etc. is coming and demand for precious metals increases.

How much will gold rally? It’s anybody’s guess but for now it struggles at $1420 level. It should overcome it soon (though Group of Twenty meeting may affect it) and may rise to $1450 by the end of this month. By the end of the year prices may reach $1500 level. For those traders, who consider gold too expensive (and it is expensive!), silver is a good alternative. It’s noticeably cheaper, sustained its rally better and currently rallies alongside gold very strongly.

The unusual heat in many wheat-producing countries, especially Russia and parts of Eastern Europe, this summer hurt crops and decreased output from autumn harvest. Concerns for possible wheat shortage increased prices and boosted demand for exports from wheat-producing countries unaffected by unfavorable weather, primarily from the US. Can we expect wheat deficit and further increase of prices?

The scenario of a price surge doesn’t look likely. Lower output in countries hit by bad weather may be outweighed by production in such countries as the US, Canada and Australia. Even in countries like Russia and European Union, where crops were harmed by weather, improving weather boosts prospect for winter wheat. Global inventories of wheat also remain plentiful, making possibility of a deficit very low.

Global output is expected to total from 643 million metric tons to 644 million. Global inventories are predicted to reach 177.8 million tons this month and 183 million by the end of this year. Global wheat consumption is estimated in a range from 657 million ton to 661.2 million. Prices forecast to remain mainly in a range of $4.95-$5.65 per bushel.