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What lies ahead for gold and industrial metals and minerals in 2011

Good start then a difficult second half. A personal view of what may happen in the global economy and for precious and industrial metals and minerals and stocks in the year ahead. Author:

LONDON – Crystal ball gazing is a dangerous game.  When things do not go as you predict then doubtless people will throw your forecasts back at you – the only comfort being, perhaps, that most predictions eventually come true – it is only the timing that is wrong.  But then that timing could be out by a few years as has been the case with some of the best analysts in the past, but doesn’t stop them saying I told you so when whatever it is eventually happens.

So why bother?  I suppose partly because the New Year is traditionally a time to set targets – and what better targets to set than one’s views of what may indeed happen in the coming year.  This can of course be totally turned on its head by external events.  A new major conflagration in the Middle East, or Korea drawing in the superpowers could occur, although one very much hopes not.  A really major natural disaster affecting the U.S. or China – as the largest contributors to global economic growth – could have a dramatic effect and create mayhem in the markets.  One cannot seriously allow for these in one’s guesswork, but nevertheless it is interesting to set out what one thinks could happen over the next 12-months and then see how accurate one’s predictions are next Christmas.  Here follows one hypothesis of what could happen in the year ahead.

GLOBAL ECONOMY

There have been reported green shoots arising for some time and there certainly is the probability that all the new money which has been, and is still being, pumped into the global economy will have some stimulus effect on growth, but despite this so far any advance has been slow.  Thus one cannot expect serious positive movement next year in the Western economies given that such growth largely will depend on consumer perceptions.  If the man or woman-in-the-street does not think the future is looking good, then it probably won’t be – not because the consumer is naturally a good trend predictor on an individual basis, but because if there is a lack of confidence the consumer will not spend and without consumer spending any recovery will come rapidly to a grinding halt.

And the global economic outlook is still not looking good – debt levels are way too high, unemployment remains at unacceptable levels and looks as though it may yet get worse, some major banks remain in a precarious position and in both Europe and within the U.S.A there are serious likelihoods of either national, state or city defaults, bankruptcies or bailouts.  What this will lead to, inevitably, is belt tightening on a scale not seen in recent memory with resultant personal and company bankruptcies and perhaps a further decline in jobs. 

These matters, as they develop, will generate more and more adverse newspaper coverage as the year progresses.  In some countries there may well be riots in the streets as government austerity measures to alleviate the huge debt positions really start to bite.  That is a recipe for loss of confidence among the public, and a serious fall-off in spending as people worry about their financial futures.

While China, India and some other emerging economies may continue to grow as urbanisation continues, this growth could slow for those nations with a significant reliance on exports if the main markets for these stutter or diminish.  That then becomes a recipe for a global depression.   However to an extent in China, and perhaps India as well, export dependence is being replaced substantially by the need to fuel internal growth which makes collapse in these nations perhaps less likely.

Key to what might happen to currencies and commodities is timing.  One suspects that news may well deteriorate as the year advances.  At some stage as confidence diminishes one fears there could well be yet another financial crisis, similar to that which happened in October 2008.  Stock markets could collapse again, as could commodity prices, and this time some major banks could put themselves beyond bailout as bad debts, which have never really gone away, get completely out of hand.

So, if this hypothesis is correct what does this mean for metals prices during the year.  An early good start for base metals and a probably more patchy, but still positive, start for gold and silver, but as the year progresses volatility born of uncertainty would spread to base metals while gold would likely strengthen unless and until any real financial crunch comes – and then it could be a case of all fall down.  But, as last time, gold would likely fall less than other metals and then recover faster.  It is well to remember that in 2008, despite its big fall in October, gold was about the only metal commodity that ended the year at a higher level than it started it.

If the U.S. economy does not pull out of the doldrums, the only saving grace for the dollar is that the nations hosting the principal currencies against which it is measured, are suffering similar problems so any net change remains muted.  China still seems hell bent on minimising any appreciation of the renminbi against the dollar to help control its own inflationary difficulties and maintain its key export markets.  Thus the only significant ‘currency’ against which the dollar might actually devalue is gold hence the expectation of decent appreciation here – at least until and unless there is any across-the-board meltdown as seen in 2008.

What happened in 2008 should also be a warning to silver, platinum and palladium investors.  Although classified as precious metals they do not have the monetary connotation of gold and these metals were amongst the worst performers in late 2008/early 2009 and recovery from the fall took two full years before anything close to pre-crash levels was attained again (whereas for gold it only took about 3- 4 months!). 

If the scenario expressed above comes about, base metals could have a very mixed year.  They are currently strong, indeed copper is at record levels, on expectation of Chinese restocking, the advent of base metals ETFs opening up new speculative outlets and a kind of fever could still see substantial appreciation – particularly for copper where supplies are reckoned to be very tight- over the first few months of the year.  But if global finances remain shaky and public confidence starts to fall seriously (and there are signs that this could be in the early stages already) stimulated by national, state or city defaults, then the strong growth could well turn around dramatically and take in a very sharp reversal.  Again, investors might learn from the lessons of October 2008 when base metals prices were decimated along with the general stock market.

Talking of which, with the above scenario presupposing that at some stage there will be another stock market crash later in the year – perhaps yet another ‘orrible October could await us.  Markets have been very resilient without much in the way of fundamental grounds for the appreciation over the past few months.  Investors are by nature optimists until, or unless confidence is severely shaken at which point they desert the markets and such crashes occur with the big money exiting first, leaving the smaller individual shareholder to bear the brunt of the losses.

Should the general stock market see another crash, perhaps not as bad as October 2008, but a significant setback nonetheless, then commodity stocks will again have a tough time and juniors in particular could be decimated as bank financing disappears again.  Blue chip gold stocks will probably fare better than most, but could still come off fairly substantially before recovering along with the gold price.

So here are the neck-out predictions for what might happen next year:

Gold – volatile first quarter with price range between $1375 and $1500, improving second quarter and third perhaps hitting $1650 late August or at the beginning of September; a serious correction in Q4, if indeed there is a market crash, back to perhaps as low as $1400, but then a fairly rapid recovery to a year-end level of around $1600.  Of course if we survive without a serious stock market crash then gold would likely end the year at $1800 encompassing a similar price increase in percentage terms over the year as was seen in 2009 and 2010.

Silver:  doing even better than gold for the first half of the year – might even hit $35 or more, but if there is a crash in say October prices could be hit very hard and would likely fall back to $20 or less without much recovery to be seen by the year end.  Even without a market crash one remains a little nervous about growth levels at the current rate being maintained.  Without a market meltdown then silver could end the year at about $36 – or perhaps a little more.

PGMs:  Good start to the year, but as confidence diminishes could have a choppy second and third quarter and could, like silver, be hit hard by any fourth quarter crash and remain weak up until the year end.  Much will depend here on recovery in the U.S. auto market and if this isn’t forthcoming and China’s auto boom stalls then prices could fall back below current levels – particularly for palladium which has had an exceptional run in 2010.

Base metals:  Copper could still have a good run ahead with new records in sight as a further degree of speculative investment materialises with tight supplies – or even a deficit – anticipated at least at the start of the year.  Here one could see the price rising to as much as $11,000/tonne by mid-year, then flattening and, again depending on whether or not there is a market meltdown, coming off sharply in Q4 and perhaps ending the year back at or around current levels – or in a worst-case scenario perhaps lower.

Of the other base metals, aluminium to remain fairly flat, but could suffer a little late in the year.  Nickel looks problematic in any case with some big projects coming into full production and any further price increases could start bringing Chinese pig nickel back into play.  It could be dragged up a little by copper early on but then flatten and perhaps start coming back down mid-year and falling back more sharply later on.  Zinc seems to be in oversupply anyway so not much should be expected in terms of early year gains although general metals markets euphoria could yet buoy it up a little, but perhaps not significantly, but then could have a torrid second half.

Lead could do marginally better than zinc – global production of the two is inextricably entwined given the two are largely found together in mineral deposits.  Tin is a much smaller market and much here depends on Indonesia’s production as the country continues to try to control illegal mining.  However it is expecting a significant increase in output in the coming year and in a relatively small market prices could come back as the year progresses.

Bulk metals and minerals: Iron ore and metallurgical coal should also start the year strongly and as long as Chinese growth for the main continues then could remain relatively stable to stronger throughout the year.  If Chinese demand flags prices could come back a little but perhaps not as significantly as could happen with most other metals.

So there we have a scenario for metals prices and stocks for the year ahead. If it proves in any way to have a degree of accuracy remember you read it on Minewebfirst.  If not then please forget the source of such financial meanderings, or put them down to one of our competitors!

 

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