From the May 01, 2012 issue of Futures Magazine • Subscribe!

Base metals see accelerating demand pace

Markets

Gold feeling toppy 

A series of sometimes contradictory and confusing statements by Federal Reserve officials and other central bankers have knocked gold forecasts lower, though many still expect that continuing economic challenges will push gold back above $1,900 per ounce later this year. 

Meir says he “cannot rule out the possibility of the U.S. economic recovery topping out,” and bringing the quantitative easing option back into the picture to throw another lifeline to precious metals. “Although we are not seeing any significant deterioration in the U.S. macro numbers just yet, the recent batch of economic statistics have not been beating estimates as handily as they once were,” he says.

John Thomas, a veteran trader and market analyst, notes that for the first time in many years, gold is ranking high on the list of preferred hedge fund shorts and that the U.S. Treasury’s sale of America Eagle one-ounce gold coins is down 70% from last year and hitting a four-year low. 

Open interest in gold futures in early April hit a two-and-a-half-year low, indicating that capital is fleeing the market. “This is usually what happens before prices die,” Thomas says, while also noting that physical markets in Asia, long a bulwark in the gold bull case, are suffering from declining volumes and that India, the world’s largest buyer of physical gold, just doubled gold import taxes, causing widespread strikes among jewelers.

Thomas tells his subscribers that a “chip shot” on the downside for gold here is $1,500 while more aggressive traders may want to reach for $1,450.

The next bull market?

Zinc and lead both are operating under surplus conditions currently with zinc inventories on the LME at a 17-year high, Meir says. “There is quite a lot of inventory in both and prices have been sluggish. Zinc and nickel are sort of more steel plays, so as galvanizing and construction slow down, it will impact those metals more,” he says. 

But Mohr has labeled zinc the “next big trade,” noting depletion of some mines and plans for closing of others starting next year along with growing demand for the metal in the auto industry and construction (see “Next big trade,” below). “I’m quite optimistic in the medium term for zinc,” she says. “The supply demand balance is going to really tighten. So we would see zinc prices averaging about 94¢ a pound this year, moving up to $1.10 in 2013. Prices were 99¢ per pound in 2011. In the middle of the decade it could very well be quite strong, much higher.” 

INTL FCStone is forecasting that most of the metals will be “mired in a kind of sideways range for much of this year because on the upside we’re going to be capped by the fact that growth is going to be very slow in the U.S. and also in Europe and the Far East,” Meir says. “Just like we ramped up a few years ago, we’re all kind of slowing down together right now. Growth will be sluggish and that will keep a cap on many of these metals. On the downside, though, China still is growing and still consuming metals, so they are kind of acting as a buyer of last resort. They’ll provide something of a floor.”

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