The key catalyst for Goldman's suddenly cautious view on gold (which still has a $1,690 price target): the end of QE2 in June 2011. So, presumably, when QE 3 is announced in May in order to allow the continued monetization of $4 trillion in debt issuance over the next 2 years, that should be very bullish for gold, yes? Irrelevant: Goldman has become just one more glorified Jim Cramer: pumping anything that is green, and dumping anything in which there is even a modest (CME margin hike driven) correction.
From Jeffrey Currie's just released report, "The cyclical commodities join the rally as gold falters."
Consumers: We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing should keep US real interest rates low. However, with the current round of QE set to end in June 2011, and our US economics team now forecasting strong US economic growth in 2011 and 2012, we expect US real interest rates to begin to rise into 2012, likely causing gold prices to peak in 2012. Consequently, we recommend near-dated consumer hedges in gold, but more so in PGMs where recovering global automobile demand will likely continue to put upward pressure on auto-catalyst demand and therefore on platinum and palladium prices.
Producers: While we expect gold prices to increase in 2011, our view that downside risks will likely increase heading into 2012 suggests this is a good time for gold producers to begin scaled up hedging of forward production, particularly for calendar 2012 and beyond.
That said, the firm is still recommending a long gold (and platinum) trading recommendation:
Long Platinum: Buy January 2011 NYMEX Platinum (Current value at $1,818.8/toz; first suggested at $1.611.1/toz; $644.7/toz gain including rolls)
We continue to expect that low real rates and the economic recovery will lend further support to platinum prices. This trade was first initiated in July 2009.
Long Gold: Buy December 2011 COMEX Gold (Current value of $1,349.6/toz; first suggested at $1,364.2/toz; $14.6/toz loss)
We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing should keep US real interest rates low.
And here is the summary outlook/key issues on key commodities:
WTI (target $105.50/bbl):
The decline in US inventories over the past weeks has acted as an upside catalyst which helped to lift WTI prices into our targeted $85-95/bbl trading range. This is consistent with our view that the global oil market has been in a seasonally-adjusted deficit since May, and that we should increasingly see declines in US inventories as floating storage has now discharged and inventories in Europe and Asia have been drawing. In our view, US onshore inventories will continue to decline towards more normal levels over the coming months. However, the US oil market itself has become increasingly fragmented by the high and rising level of oil inventories in the mid-continent. As a result, WTI has been trading at a significant discount to other light sweet crudes, such as Brent and Light Sweet Louisiana (LLS). As the surplus of oil in the US mid-continent is not being driven by weak US demand, it will likely not be alleviated by the ongoing recovery in US demand and require a redirection of pipeline infrastructure to carry crude from the US mid-continent to the US Gulf Coast to correct it. As a consequence, WTI prices could continue to trade at a discount to other local crudes.
Brent (target $103.50/bbl):
Brent crude oil prices have been trading close to $100/bbl over the past days as global inventories continued to decline. We expect that, once global inventories have reached normal levels, OPEC spare capacity will start to be drawn as global oil demand remains strong, which gives some further upside potential to Brent prices in the second half of 2011.
Incidentally, this should make for a great compression arbitrage. If Goldman is even remotely correct, going long WTI and short Brent should generate a substantial IRR.
RBOB (target $2.62)
US gasoline inventory draws and strong demand for US gasoline exports have lent support to gasoline margins in the recent period. Particularly near-dated margins against WTI have been strong, as WTI is again trading at a steep discount to other local crudes such as LLS. However, we continue to believe that ample refinery capacity will keep any rally in margins muted and short-lived.
NYMEX Nat Gas (PT $4.50/mmBtu)
NYMEX natural gas prices have been supported by colder-than-normal temperatures so far this winter, but the underlying balance remains in a deep surplus created by continued growth in shale gas production and a weak economic recovery. Despite a leveling off in production efficiency gains in aggregate US shale gas production, we believe that debottlenecking in well completion services and the impact of high oil prices on gas production economics will spur significant growth in US natural gas production in 2011. We believe that US natural gas prices will have to move lower in 2011 and 2012 in order to curb natural gas production growth, and more importantly, to incentivize further fuel substitution in the power generation sector to rebalance the market. Consequently, we forecast an average NYMEX natural gas price of $4.00/mmBtu in 2011 and $4.25/mmBtu in 2012. Still, even taking into account supply and demand responses to these lower prices, the market remains vulnerable to weaker-than-normal weather-related demand and further positive production surprises, in our view.
LME Copper (PT:$11,000/mt) - better hope the "Cold Fusion" story is a hoax here..
Copper prices broke out to new nominal all-time highs into 2011 on the back of supply disruptions in South America. However, while we have little concern that Chinese end-demand is slowing relative to our forecast, we do believe that current markets are adequately supplied during an abnormal seasonal destocking in China, and therefore it is too early for prices to spike higher. Nevertheless, over the medium to long term, we continue to see greatest upside in copper of all the metals due to the combination of lower exchange inventories, robust demand largely driven by EM urbanization, and a constrained supply outlook. Although exchange inventories remain well-above the critically-low levels that persisted for much of the late 2000s prior to the global financial crisis, we expect the above drivers will be sufficient to deplete these inventories over the course of 2011, forcing the market back into a period of demand rationing characterized by extreme levels of backwardation. Further, this backwardation will likely come on top of well-supported long-dated prices given the need for investment in new mine capacity to meet rising global trend demand. As a result, we maintain our 12-mo ahead copper price forecast of $11,000/mt and believe that prices could spike substantially above these levels, most likely in late 2011.
Gold (PT: $1,690)
With the US Federal Reserve conducting a second round of quantitative easing and likely keeping its short-term nominal interest rate target near zero through 2011, we expect the low US real interest environment, combined with continued gold-ETF and Central Bank buying will continue to provide support for gold prices 2011. However, with the current round of QE set to end in June 2011, and our US economics team now forecasting strong US economic growth in 2011 and 2012, we expect US real interest rates to begin to rise into 2012, likely causing gold prices to peak in 2012.
Silver (PT: $28.2)
Over the long run, silver prices tend to track gold prices. Thus, our silver forecast reflects the historical ratio to gold.
Cocoa (PT: $2,4000/mt)
Cocoa prices remained volatile over the past month as market focus shifted between the outlook for strong West African production for the new crop year starting October 1 and concerns that political instability in Ivory Coast may disrupt the country’s exports. On the supply side, the latest ICCO forecast for global output points to growth of 6 to 8% while on the demand, the ICCO expects the strong recovery in cocoa grindings of 5% experienced in 2009 to slow to 2.5% in the 12 months ending September 2011. On net, this points to a market surplus for the 2010/11 crop year and we expect lower prices with a 3-mo forecast of $2,700/mt and 6- and 12-mo price forecast of $2400/mt, although volatility may remain high near term on Ivory Coast developments. Over the long term, as demand continues to grow, the production outlook for the Ivory Coast will remain key as aging orchards, poor infrastructure and political instability have curbed production and investment over the past few years.
Much more in the full report: