Commodities Bulls Running Wild

Globe says Iamgold, others have seen strong gains

2010-10-14 07:33 ET - In the News

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The Globe and Mail reports in its Thursday, Oct. 14, edition that BMO Nesbitt Burns analyst David Haughton says while the large-cap segment of the gold equity marketplace has generally lagged behind the price of gold bullion, the mid-sized segment has proven more responsive to bullion's price gains.

The Globe's David Parkinson writes in the Number Cruncher column that Mr. Haughton says, "The intermediates have captured a lot of the price momentum, because that's where the growth is."

Investors looking to capitalize on bullion's rally have favoured companies with strong growth profiles because it means they will capture rising benefits from the record commodity prices as their production increases.

The highly profitable price for gold also strengthens the case for increasing production, thus delivering growth potential earlier than the market would otherwise have anticipated. While that thinking has propelled strong gains in the intermediates, it has also left them looking expensive relative to the senior gold miners, with less upside potential.

Stock with outsized price gains are Iamgold, Golden Star Resources, Mineral Deposits, New Gold and Semafo.

Jonathan Ratner, Financial Post

The commodities bull has returned with a vengeance as investors stampede out of sinking currencies into the safety of cold, hard assets. While a rebound in the economies of China and other emerging markets is also stoking demand, a surge in commodity prices from gold to copper to corn reflects a general lack of confidence in paper money as the U.S. Federal Reserve prepares to ease monetary policy further and the U.S. greenback sinks.

“When central banks around the globe are in a race to see who can print the most money, people are going to buy commodities,” said Phil Flynn, senior commodity analyst with PFGBest Research in Chicago.

“At the end of the day, they know the commodities are going to have some value.”

Prices for a raft of commodities surged Wednesday sending the Reuters-Jefferies CRB Index to its highest level since October 2008. Gold, the go-to commodity in times of currency concern, rose 1.7% to a record US$1,373.65 an ounce and is up 25% year-to-date, silver reached its highest level since the 1980s, copper hit a two-year peak and sugar hit its highest level since February, also boosted by weather-related concerns.

A report of record crude oil imports by China in September demonstrates real demand growth, some of which has come from government stimulus. But a likely build-up of Chinese reserves also reflects oil’s value as an investment.

Goldman Sachs has raised its 12-month forecast for bullion to US$1,650 an ounce on the prospect of more easing from the Fed, while the macro-economic backdrop prompted Canaccord Genuity to hike its peak gold price forecast to US$1,500.

“We see the outcome of global financial stimulus efforts as broad currency devaluation, inflation and gold’s increased status as a reserve and investment asset,” Steven Butler, Canaccord analyst, said. He labelled gold’s correlation to increased global U.S. dollar liquidity “spectacular.”

And while high levels of optimism among advisors would constitute a sell signal in many markets, buying gold when bullish sentiment is high and rising has historically proven to be a good strategy.

Other than natural gas, which has suffered from a wave of cheap new supply from shale gas plays, it’s hard to find a commodity that isn’t on the rise. Still, oil prices have generally lagged, averaging within US$5 of Saudi Arabia’s US$75-per-barrel price target for five straight quarters.

Deutsche Bank expects a shift of this target to US$80 at OPEC’s meeting today and sees the potential for US$90. Yet the recent price move for crude in currencies such as the euro and Australian dollar hasn’t been very meaningful. As a result, not everyone sees much upside for oil above US$80.

For example, UBS believes decelerating incremental demand and ample spare capacity will keep crude at current prices. Inventories are nearly 8% above the five-year average and oil product stocks are 25% above the long-term average.

Whether it is aa issue such as the drought that destroyed a third of Russia’s grain crop, the ongoing strike in France that has shut its biggest oil port, or the increase in liquidity from policymakers, global investors are clearly thirsty for commodities and may decide to let their winners run.

Financial Post

Read more: http://www.financialpost.com/Investors+thirsty+commodities/3665924/story.html#ixzz12KeDyaoT