Average gold price to hit record high in 2007

Wed Apr 4, 2007 12:09 PM BST

By Atul Prakash

LONDON (Reuters) - Gold prices will set a record high this year in terms of their annual average and may scale new absolute peaks on a weaker dollar outlook, a slowdown in the U.S. economy and geopolitical tensions, a report said on Wednesday.

Precious metals consultant GFMS said in its Gold Survey 2007, which marks the 40th anniversary of its annual report, that worries over high oil prices and inflation might resurface should the United States decide to ratchet up the pressure on Iran.

"It's looking pretty certain that the record in terms of the annual average, $614.50 (an ounce) back in 1980, is going to fall this year," GFMS Chairman Philip Klapwijk said in a statement.

The average gold price was $603.77 an ounce last year.

"I would also be far from surprised if this year we saw the market moving above the 2006 high of $725. Quite whether we would then get close to the all time high of $850 is more doubtful, but I would certainly expect the upward price trend to continue on into 2008."

Firm gold prices so far this year, the acceptance of higher floor prices by physical buyers and a further, albeit smaller, decline in gold supply were also expected to boost investor confidence in the metal, the report said.

Spot gold was around $665.50 on Wednesday, up five percent from the end of 2006. Prices hit a nine-month high of $689 in late February, near a 26-year peak for the spot price of $730 in May last year.

GFMS expected a drop in scrap supply in the first half of 2007 and subdued selling by central banks, which was likely to offset a modest rise in mine output this year.

Global mine production fell 3 percent to a 10-year low of 2,471 tonnes in 2006, with the maximum fall recorded in Asia despite China lifting output by 8 percent. GFMS forecast world production rising between one and two percent in 2007.

Central bank sales fell by 51 percent to 328 tonnes in 2006, resulting in a five percent drop in total gold supply to 3,906 tonnes. GFMS said net sales had continued in 2007 and might persist.

JEWELLERY DEMAND AT 15-YEAR LOWS

World gold demand fell by five percent to 3,906 tonnes in 2006 from a year earlier, mainly because of a 428-tonne slump in jewellery offtake to a 15-year low of 2,280 tonnes. Jewellery accounted for 58 percent of global gold demand last year.

"The chief architect of the decline was developments in the gold price, not only in terms of the absolute level but also the degree of price volatility," GFMS said.

Just three countries -- India, Turkey and Italy -- accounted for half the gross decline in total jewellery demand in 2006.

"Looking ahead to this year, price developments will remain a key factor in determining jewellery fabrication ... However, the decline this year, in percentage terms, is unlikely to match the 16 percent fall seen in 2006," the report said.

The report noted that gold dehedging accelerated last year, with a cut of 373 tonnes from the global hedge book. Total outstanding forward sales, loans and the delta hedge against options positions at the end of 2006 was at 1,364 tonnes.

Hedging allows producers to lock in prices for future output but can backfire if the market rises above the hedged price.

GFMS said gold dehedging might exceed 300 tonnes this year as producers were bullish.

Interest in gold exchange-traded funds and over-the-counter market also grew last year, but speculative activity in the main commodity exchanges declined. The gold market was dominated by institutional players and high net worth individuals, it said.

Faber Says Hedge Risks on Stocks With Commodities, USD May Collapse: Bloomberg

Faber Says Hedge Risks on Stocks With Commodities, Dollar May Collapse

3/2/2007 5:27:00 AM ET Related symbols: CCR CFC MS MWD
Bloomberg

Hedge Risks on Stocks With Commodities, Says Faber (Update1)

By Patrick Rial

March 2 (Bloomberg) -- A global selloff in equities is just a foretaste of losses to come should the level of debt drive the U.S. economy into recession said Marc Faber, who successfully predicted the U.S. stock market crash in 1987.

He recommended investors buy commodities such as gold, oil and copper. ''I think we're in the middle of the biggest asset bubble ever,'' said Faber, who oversees $300 million in assets at Hong Kong-based Marc Faber Ltd., in a speech at the CLSA Japan Forum today in Tokyo. ''This asset growth has been largely responsible for driving economic growth, especially in the U.S.'' Stock market losses will continue, he predicted. The U.S. will eventually be unable to increase its debt spending, and when that time comes, it will rattle the markets, Faber said. ''If the debt growth slows down the economy will either slow down or go into recession,'' Faber said. ''That will lead to a correction that will be much more substantial than what we have seen so far.'' There are signs that U.S. consumers may no longer be able to borrow and spend as freely as they once did. Lenders have warned that delinquent and non-performing subprime mortgage loans, which are loans that carry higher interest rates than those offered to a bank's most credit-worthy customers, have increased.

Shares of Countrywide Financial Corp., the largest subprime lender in the U.S., dropped as much as 4.4 percent yesterday after the company said one out of every five subprime borrowers was late on payments at the end of last year.

Risky Loans

Banks may be less willing to lend out money that the consequences of risky loans are becoming apparent, Faber said.

Problems in the subprime loan industry are ''the first crack in the system that shows some illiquidity has occurred,'' he said. ''The Fed can't tighten monetary policy but the market can and that has started to happen.'' A rout in stock markets worldwide started in China on Feb. 27 amid concern the government of the fastest-growing major economy will tighten controls on investment. Declines were accentuated as U.S. economic data pointed to slowing growth in the world's biggest economy. In the U.S., the Dow Jones Industrial Average has fallen 3.2 percent in the last three sessions. Stocks across Europe and Asia also declined, extending their worst slump in four years and wiping out more than $1.5 trillion in global market value. ''The little correction in the last couple of days is just an appetizer,'' Faber, the publisher of the Gloom, Boom and Doom Report said. He recommended investors buy commodities as a way of reducing risk that equity markets will fall globally. He predicted a ''severe correction'' in global assets in ''the next few months'' in an interview with Bloomberg on Jan. 8. 'Own Physical Gold' The Dow Jones has gained 56 percent during the past four years, reaching all-time highs, while the Dow Jones Stoxx 600 benchmark of European shares has nearly doubled. The Morgan Stanley Capital International Asia-Pacific Index reached a record on Feb. 27. ''You'd be better off owning the physical commodities,'' Faber said. ''I would say own physical gold'' and not commodities derivative products.

Commodities will also rise in value should the geopolitical situation become more risky, he said. John Bolton, the former American envoy to the United Nations, said yesterday the U.S. should pursue ''regime change'' in Iran because European governments refuse to back sanctions tough enough to halt the suspected Iranian nuclear-bomb program. 'Dollar Could Collapse' ''If you want to hedge against war risks you should be long commodities,'' said Faber. ''I'm convinced that it's inevitable that either the U.S. or Israel will have to go and bomb Iran. If that happens, obviously physical commodities will go up very strongly.'' Faber added that the U.S. current account deficit, which is on a rising trend and the main source of global liquidity, may cause the dollar to ''collapse'' against currencies globally.

The deficit widened to a record $225.6 billion last quarter as the trade gap grew and the country paid more interest to overseas investors. The shortfall in the current account, the broadest measure of trade because it includes transfer payments and investment income, amounted to 6.8 percent of gross domestic product, the second-highest level ever. ''Structurally the currency will weaken, the dollar is very vulnerable against precious metals'' because of deficits as well as loose monetary policy that encourages inflation, he said. ''Dollar assets will continue to decline relative to the rest of world. It's possible the dollar could collapse.'' Faber said Japanese shares offer a better bet for investors because the valuations are lower compared with other countries, when interest rates are taken into account. ''Stock prices in Japan would seem to me to be quite reasonable compared to stock prices in the United States or Europe,'' he said.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net . Last Updated: March 2, 2007 03:40 EST

Is Copper Signaling a Recession?

Jan 6, 2006

By Bonddad
bonddad@prodigy.net


From CBS MarketWatch

A sell-off in commodities -- from copper to crude oil -- over the past few sessions is telling some veteran market watchers that a slowdown in economic growth, likely one of considerable magnitude, is already underway.

In the last two days alone, commodity prices seem to have fallen off a cliff. Copper futures, which tumbled 7.7% on Wednesday, fell another 1.8% on Thursday -- and have dropped 27% from their December highs.

Crude-oil prices fell nearly 5%, following a 4% drop in the previous session. The front-month futures contract was trading at its lowest level since June 2005. See Futures Movers.

Here's a daily copper chart. The price has gapped down and continued downward last week:

The reason copper is predictive?

Most commodities are used in the production of industrial goods. When producers start demanding fewer raw materials, it becomes noticeable in commodities prices much earlier than in official economic statistics, explained Barry Ritholtz, chief market strategist at Ritholtz Research & Analytics.

Copper, in particular, is often used as a reliable economic indicator because of its widespread use in production.

"Copper is the metal with a Ph. D. in economics," Ritholtz said. "It's used in the wiring of homes and offices, in plumbing in construction, and it's also a key component in electronic goods.

High stockpiles are one of the reason for the drop in copper prices:

Stockpiles of copper monitored by the LME have doubled since the start of last year. The exchange said earlier today copper stocks held in its warehouses had risen another 1,700 tonnes to total 194,875 tonnes

However it also reported that cancelled warrants, which represent warehouse stocks booked and due for delivery, have climbed to just over 17,000 tonnes, suggesting copper might soon start leaving LME warehouses

"With the large inflows of metal believed to be nearing an end, net falls in LME stocks could start to resume, which would support prices," said UBS Investment Bank analyst Robin Bhar

Simple supply and demand comes into play here. Higher supply = lower price.

Bloomberg has a bit more to flesh out the story:

Copper prices in New York had the biggest weekly decline in 10 years as slower U.S. economic growth and a building slump reduced demand for the metal used in homes, appliances and cars.

Global stockpiles are at the highest since June 2004. The U.S. economy grew at the slowest pace of 2006 in the third quarter, led by a decline in homebuilding. Builders are the biggest consumers of copper. Prices tumbled 12 percent this week, touching a nine-month low.

``I don't think anybody has predicted it would go this low,'' said Karen Poniachik, Chile's mining and energy minister and chairwoman of state-owned Codelco, the world's biggest copper producer.

According to Bloomberg, the slowdown in the US housing market is a prime reason for the drop:

Construction spending fell for a third month in November as homebuilding fell by 1.6 percent, the eighth-straight drop, the Commerce Department said this week. Fewer Americans signed contracts to buy previously owned homes in November, suggesting continuing weakness in the real estate, an industry group said yesterday.

``If overall housing sales stay slow, you could easily pare another 30 or 40 cents off of copper,'' Frank McGhee, head metals trader at Intergrated Brokerage Services Inc., said yesterday. ``Copper is a leading indicator. It's very sensitive to perceived economic conditions.''

Something to keep in mind is the futures markets have become the high tech market of the late 1990s. A ton of money flooded into the futures markets over the last 6 years. This is one of the reasons for the huge price run-ups over the same period. Increased demand = higher prices. Some of this selling may simply be people taking profits. In other words -- this could be speculators leaving the market.

However, the fundamentals indicates there may simply be weaker demand. Housing construction in the US is down. Overall stockpiles are up. This indicates copper production may be too high right now, anticipating a level of demand not warranted by the underlying economic fundamentals.

For market and economic commentary, go to the Bonddad Blog

Brimelow, CBS Marketwatch: Gold & Oil to Rule New Year

PETER BRIMELOW

Testing the new year's metal

Commentary: Letter sees growing demand for gold, silver, uranium - and oil

MarketWatch

Last Update: 12:02 AM ET Dec 14, 2006

NEW YORK (MarketWatch) -- In the new year, oil and gold will still rule, according a top-performing newsletter.

Justin Litle's Outstanding Investments is the fifth-best performing letter over the past 12 months, according to the Hulbert Financial Digest, up 37.2% vs. the dividend-reinvested Dow Jones Wilshire 5000's 16.54%.

Over five years, Outstanding Investments is up a remarkable 36.88% annualized, vs. 8.86% for the total return DJ Wilshire.

Unquestionably, this is because, for whatever reason, Outstanding Investments has been in synch with a major market move: the rebirth of oil and gold. But you can't argue with Hulbert numbers: It's really worked.

Editor Litle is aware of this, but he's carrying on anyway. As he wrote Wednesday night:

"Every New Year's Eve in recent memory, I've thought to myself: "It can't get any crazier than this. How can the new year possibly top the last?" Yet for five years running at least, the new year HAS topped the last, in all the ways that count.

"2007 is shaping up to be the same, yet even more so. A lot of chickens will be coming home to roost. 2007 could be the year we see oil above $100 ... the year gold breaks its 1980 highs ... the year silver jumps over the moon ... the year developing-world economics and infrastructure woes really hit home ... and that is just a start."

This is true both strategically and tactically. When I last checked in, Outstanding Investments was standing firm with oil and gold. See Oct 16 column

It worked, especially with gold.

Outstanding Investment's latest letter was published some time ago, in early December. The service continues to be intensely focused on what it sees as a looming brute physical shortage of energy, and raw materials generally, in the world.

It wrote: "It's like a broken record, I know: Chinese growth is driving the commodity boom. We hear it all the time. And it's true. The fact of the matter is that China has struck some incredible deals with countries like Canada, Russia and Venezuela, and the list goes on. While we've seen a pullback in many of the commodities in the third quarter, China used that pullback to prepare for the next leg of the rally in commodities. Meanwhile, the U.S. has been asleep at the switch and busy trying to stave off nuclear proliferation in various regions of the world, with about 50/50 success. The U.S. is woefully behind in the race to snatch up valuable resources and lock in key partnerships as we head past the halfway mark of the first decade of the millennium."

One result: Outstanding Investments seconds veteran editor Jim ("The Dines Letter") Dines' fascination with uranium. See Nov. 13 column

For example, Outstanding Investments continues to recommend Cameco Corp. (CCJ

Cameco Corporation...

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... despite the recent flooding of the huge Cigar Lake, Saskatchewan, uranium mine, in which Cameco has a half interest. If anything, Outstanding Investments seems to think that this will just exacerbate the supply crunch.

Outstanding Investments does think about other things. For example, its most recent stock of the month was Walter Industries Inc. (WLT

Walter Industries Inc

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Admittedly, it's partly a high-quality metallurgical coal play. But Walter also owns Mueller Water Products, a leading provider of water infrastructure products. Outstanding Investing thinks U.S. infrastructure is heading for a crisis. And, as it happily quotes someone saying, "Water is the new oil."

Outstanding Investments recommends buying WLT below $48.

Barclays: Investors Shift to Commodities

Related Commodities Bull Run to Last Until 2014 - 2022 --- Markets

Dec. 12, 2006, 12:43PM
Barclays: Investors Shift to Commodities

© 2006 The Associated Press

NEW YORK — Investors are
increasingly turning to commodities to diversify their portfolios as the methods available to gain exposure to the market get more creative, according to an investor survey by Barclays Capital released Tuesday.

Barclays' second-annual commodities investor survey showed marked changes, over the course of one year, in the way investors view the commodities market and its role in their portfolios.

The survey of the investment bank's clients took place at two conferences each year in 2005 and 2006, one in Barcelona, Spain, and another in New York. Survey participants included large pension funds, retail distributors and _ carrying particular weight in New York _ hedge funds.

Investors are making "a very clear shift into having at least some commodities," said Kamal Naqvi, Barclays Capital director of commodities sales.

About 50 percent of survey respondents in Europe said their portfolios contained no commodities exposure in 2004 and 2005. When asked what percentage of their portfolio would be made up of commodities over the next three years, the number saying "zero" dropped to just 7 percent.

New York respondents indicated a significant shift into commodities, with more than 50 percent saying they'd seek to make commodities more than a tenth of their total portfolio.

The term "commodities" covers most raw materials, including precious metals such as gold, crude oil, industrial metals like copper, agricultural products and others. Aside from actual trading of physical commodities, investors often get exposure to the sector through index funds, which track the movement of a given basket of commodities without purchasing the physical asset.

However, investors are increasingly shifting their funds from passive, long-only indexes into a mixture of passive and active management and into structured commodity products, according to the survey. Those products could include one that follows Chinese demand for industrial metals or others structured more like equity investments, with a fixed-income payout.

There has been a "broadening out in the way investors can get exposure to commodities," said Barclays research analyst Kevin Norrish.