In an equity research note published Tuesday, BMO Capital Markets projects gold and the precious metals complex in general to move higher into 2008.
BMO Global Commodity Strategist Bart Melek suggested that rising food and energy inflation and the equity market are adding luster for gold.
He wrote that BMO's optimism for gold and the rest of the precious metals is primarily driven by the view that inflation is start to get entrenched globally, equity markets are set for a period of volatility owning to renewed central bank hawkishness and expectations that the U.S. dollar (trade-weighted) will continue to be in a weakened state for the foreseeable future.
Melek asserts that the greenback will remain relatively weak in trade-weighted term in order to help reverse the substantial global trade and current account imbalances, which will help the gold outlook.
Also quite supportive of the longer-term gold outlook is the expectation of rising wealth in India, China, the Middle East and the rest of the development world-traditional buyers of gold. Jewellery sales and the use of gold and other precious metals as a store of wealth in these regions are expected to become increasingly important, he advised.
The yellow metal is also likely to be increasingly used as protection against financial market and geopolitical instability-portfolio-driven reasons BMO currently is positive on gold, he added.
In his research, Melek also asserted that a highly utilized mining sector and sky-high costs make a bust unlikely.
The recent earthquakes in China; flooding in Australia and power problems in Southern Africa; strategic behaviour on the part of producers in response to lower prices and maintenance (e.g. recent NHP Billiton nickel project shutdown); rising costs and still-low inventories are projected to keep metals firm when measured against historic norms, he suggested.
Rising cost structures, equipment and skilled labour shortages all give support to the BMO thesis that the short- and long-term metal prices are not likely to revert to historic means as long as the global demand outlook remain intact, Melek advised.
Melek forecast that global demand for many metals and bulk commodities, including copper, zinc and met coal, is expected to grow as much as 40-50% over the next decade. Since supply is proving to have a very hard time keeping up with demand growth, metal and bulk commodity prices appear well supported over the long term, he said.
Nevertheless, BMO's research found that concern that poor G7 economies may erode demand for metals and other commodities, the end of labor strife in Chile, rising LME supplies and production increased also helped knock metals off from their perch-a trend that will likely be extended.
For lead, zinc and, to some extent, nickel, the expectation that the market is headed for a potential small surplus, following a period of deficits has moved markets from an ‘auction' pricing model to a ‘marginal cost' pricing model, spurring considerable short selling, according to Melek.
Nevertheless, contracts for bulk commodities such as iron ore and metal coal continue to be at record levels, owing to supply constraints and high demand, he added.