Scotiabank economist Patricia Mohr says the big picture outlook for gold remains bullish, suggesting gold could come into its own as a true ‘safe haven' in coming months.
Noting that gold prices have outperformed base metals in the past six month, Mohr advised, In view of a massive U.S. budgetary deficit likely to surpass US$1.25 trillion in FY2009, Asian and Middle Eastern central banks and sovereign wealth funds may seek to diversify away from U.S. Treasury Bonds and agency debt.
In her monthly analysis of the Scotiabank Commodity Price Index, Mohr highlighted record investor inflows into gold ETFs...have also lifted precious metals prices, as retail and institutional investors seek a ‘safe haven' from volatile currency and equity markets.
Meanwhile, while commodity prices have not yet hit the floor, Mohr said the pace of their decline is slowing and the forced, indiscriminate selling by funds-triggered by investor redemptions and tight-credit appears to be subsiding. Many prices are approaching average world cash costs, triggering substantial production cuts, new project deferral and tighter supplies.
Mohr's research revealed the rapid decline in base metals prices has been unprecedented and reflects in part the forced exit of hedge funds from commodity market positions due to fund redemptions and curtailed credit in 2008:Q4.
However, Mohr noted copper prices have lifted off the recent low, although they remain vulnerable to poor global economic activity and a huge OECD inventory correction in 2009:Q1.
Zinc prices have also been supported b pro-active and very unusual production cuts by twenty smelters (including Zhuzhou in Chiba -20%, Trail in B.C. -20% to mid-2009 and Kidd Creek in Ontario -30% to mid-2009, she said. However, zinc prices still remain just below average world cash costs.
Meanwhile, spot potash prices at the Port of Vancouver remained at record levels of $872.50 per tonne last month, though new business has come to a virtual halt, Mohr said. She suggested that stronger nitrogen fertilizer prices next spring may rekindle interest in potash.
Mohr's research revealed that Scotiabank's Commodity Price Index lost further ground in December for the fifth consecutive month, falling -5.5% m/m.