Gold

Credit Suisse recently issued the following forecast for gold:

‘Demand for gold can be divided into two: monetary and non-monetary demand. The latter mainly consists of jewellery and industrial demand for dental or electronic products. Monetary demand can be classified as demand from financial investors, central banks and "hedgers," who use gold as a protection against US dollar weakness, rising inflation or as a general safe haven.

Traditionally, investors buy the metal as a safe haven during times of crisis. The gold price rally that took place during the second half of 2008 was mainly driven by safe haven buying. Likewise, the period of profit-taking which has taken place since March 2009 was mainly a reflection of reduced safe haven holdings amid soaring risk appetite. Monetary demand is highly flexible and the main source of market dynamics, according to Credit Suisse research. Despite this recent dip due to reduced safe haven buying, the prospects for further substantial increases in monetary gold holdings are good. Since Credit Suisse’s economists expect the dollar to weaken and inflation to rise, this should support demand from investors that like to hedge against these factors. Moreover, low real interest rates should keep the opportunity cost of holding gold low. They also forecast central banks worldwide to keep interest rates at the current low level for the next 12 months. Since inflation is expected to increase toward the year-end, this should then bring down real interest rates, potentially even into negative territory. In the past, gold reacted strongly positive to negative real interest rates and it is expected to be an important driver this time as well.

Non-monetary demand is likely to remain relatively stable over the longer term, driven by rising living standards in the large gold consuming emerging markets - India and China. Nevertheless, it is quite price sensitive and dependent on the business cycle in the medium term. Over the last few months non-monetary gold demand suffered strongly from the recent price spikes. But until now, the surge in investment demand for gold has more than offset the shortfall in jewellery demand, thus pushing total demand higher.

Gold supply is likely to decline in the long term, effectively limiting the downside risks to gold prices. The higher scrap supply due to current high prices should be offset by a drop in gold sales by institutions such as central banks and lower mine production. According to the World Gold Council, the outlook for mine production has deteriorated due to financing constraints imposed on the industry, in particular on the smaller players. Another factor limiting supply are low central bank sales. Central banks’ gold sales are not expected to increase substantially, as last year's sales were well below the agreed quota under the Central Bank Gold Agreement (CBGA). Additional institutional sales are thus only likely to come from the IMF. The Washington-based institution has already proposed the sale of about 400 metric tons of gold. However, those sales are likely to be carried out under the current and a future version of the CBGA. So if the IMF joins the quota system as a seller, it means that the selling quotas of other CBGA members will be reduced, thus limiting the impact of those sales. Moreover, part of the IMF gold sales is expected to be purchased by other central banks. Apart from that, any IMF gold sales will still require legislative action by several member countries including the US.

Strong monetary demand coupled with a muted supply outlook should keep gold prices well supported over the next few months. However, the decline in jewellery demand should limit the medium-term upside potential, since it is likely to diminish quickly when prices increase too high or too fast. But in turn, jewellery demand is set to provide a floor to prices when investment demand abates, as the lower prices should see non-monetary demand recovering. Credit Suisse therefore forecasts gold prices between 1,100 and 1,200 dollars per ounce by the end of the second quarter of 2010.’

Silver

SCOTIAMOCATTA, a member of the Scotiabank Group, recently forecast for silver as follows:

‘The situation in Silver is very interesting, even before the recession the market was running a supply surplus and this was made worse by the drop in demand, even though supply was cut too. However, the distress in the markets and concern over how this financial mess and the global imbalances are going to be corrected has increased demand for safe-haven assets, such as the precious metals. In the medium term, while the supply surplus is present, Silver will be vulnerable if investors’ commitment to Silver wanes. If investment interest fails to soak up the annual surplus prices are likely to fall, indeed falling prices would then no doubt trigger liquidation of existing positions that would add to the downside pressure on prices. However, we do not think such a scenario will unfold between now and the end of 2010, although there is no harm in having a contingency plan for when such a time arrives. Investor interest as seen by the steady climb in the ETFs’ holdings shows ongoing strong demand and with ETFs increasing their size by some 2,700 tonnes in the first nine months of 2009, it does look as though this will more than absorb the market’s surplus. With ongoing concern about the dollar and US creditors vocally warning about dollar devaluation, not to mention the risk of a double-dipped recession, there seems plenty of reasons for investors and investment institutions to look to safe-guard their wealth and to diversify their dollar exposure, all of which should underpin demand for precious metals.

In the near term, prices are expected to consolidate, but there is also a risk of a deeper correction in equities and industrial metals, that could drag Silver prices lower initially. However, we think dips in Silver prices will be seen as a buying opportunity, by investors and fabricators alike. In addition, we expect fabrication demand to recover later in 2010 and with that is likely to come industrial restocking. So Silver could, for a time, see strong demand from all areas of demand. In addition, we feel Silver is likely to follow in Gold’s footsteps and as such we expect prices to spend the bulk of 2010 within a $13-$25/oz trading range. Should central bankers and politicians manage to find workable solutions to the bigger issues troubling the financial markets then demand for safe-haven products could suffer and then some fast corrections would likely follow, but we think there is little chance of this happening any time soon and therefore we remain bullish for Silver.