In ANZ's weekly commodity report, analysts suggest that gold could firm as record high oil prices and a shaky US dollar prompt longs to re-position.
Senior Commodity Analyst Mark Pervan and Graduate Analyst Natalie Robertson also warned that base metals could be choppy with profit-taking in zinc and lead offset by buying in copper.
Meanwhile, ANZ's analysis also suggested that coal prices should firm if oil prices remain high.
Although ANZ advises that gold could firm this week, as the resilience in (record high) oil prices must be re-setting higher global inflation concerns, which should trigger a catch-up rally in gold (compared to oil). The USD also appears to have taken a short term turn for the worse, which should buoy the gold as a currency hedge.
Nevertheless, Pervan and Robertson cautioned that, We expect gold prices to drift lower over the coming months, with increasing signs that the fall in the USD is near the trough. Easing concerns in US equity markets could also temper demand for gold as a safe haven alternative. Modest central bank sales, which the latest data show are unlikely to reach the 500t limit of the Central Bank Gold Agreement, despite near record prices may limit the downside.
...We maintain that oil prices should fall off an overbought level, which would cool inflation fears tempering stronger gains in gold. Encouragingly, less volatile gold price should encourage more physical gold buying from jewelers who have been sidelines recently by the strong movement in prices, they suggested.
ANZ noted that base metals could be choppy this week as a bruised USD should limit any heavy selling, with the market still reeling from last week's sick US consumer confidence report.
Recent strong gains in lead and zinc should reverse, with reports supply outages from the Sichuan earthquake may have been over-stated with the Chinese province a relatively modest metal producing region, Pervan and Robertson said.
The re-emergence of potential strike action in Chile should support buying on copper, despite the high price levels, they added. The recent jump in cancelled copper warrants also flags near term decline in LME supply. Aluminum might also firm if oil prices hold around record highs and earthquake damaged power supply in China becomes more apparent.
Nonetheless, ANZ warned that prices over the coming months are likely to be choppy to weaker, with sliding US economic conditions dictating sentiment. Currency markets may also provide less support for metals with early signs of a floor in the USD.
On the flipside, supply remains tight for most metals, especially copper, and should keep a high floor for prices, ANZ noted. Nickel could be the positive surprise on signs stainless steel order books in Europe and Asia are returning to normal levels after a drop off in demand in 2007.
ANZ's analysis suggests that the growing realization that energy demand is not waning despite record high prices appears to be spooking a restocking phase at what could be low-ish current coal prices. This can only accelerate as we approach the seasonal pick-up northern hemisphere (summer) demand. Record high Baltic freight rates are also implying strong demand/tight supply, which should push coal swaps and spot FOB prices higher. The analysts also noted that China, South Africa and Russia are all limiting coal exports.
Spot prices over the coming months may ease mildly, according to Pervan and Robertson.
However, ongoing infrastructure constraints in Australia, and rising demand throughout Asia is likely to keep a high floor on prices, they suggested. The switching of higher quality thermal coal into the much higher priced semi-soft coal market and slowing exports out of South Africa and Vietnam could be the surprise upside factor for better prices in the second half. Australia will struggle to provide the swing supply, with ongoing headaches over transport infrastructure and a delayed return of flood impacted Queensland supply keeping market conditions tight.