Government infrastructure spending will drive a rebound in metals prices, while gold may reach $2,000 an ounce in the next year if the dollar falls, an executive with UK fund house Schroders (SDR.L:Quote) said.
The potential for very sharp price rises in industrial metals this year is very good, emerging market debt and commodities product manager Christopher Wyke told Reuters.
We think in infrastructure the cutbacks will be very limited. When a recession happens, governments in the U.S. and elsewhere accelerate infrastructure spending.
He said that despite the global economic downturn, Asia retains its appetite for infrastructure spending, which will support prices of metals such as copper and zinc. Prices of the two metals have fallen around 58 percent and 54 percent respectively from a year earlier.
The problems in Asia are not structural, they're essentially cyclical -- a very severe cyclical downturn, the London-based Wyke said in an interview at his firm's Hong Kong offices.
Wyke does not directly manage funds but oversees Schroders' commodities fund products which hold $4.5 billion in assets, including a recently launched gold and metals fund.
He said Chinese infrastructure spending will be a key driver of metals demand and prices.
The level of credit in China has been shrinking in the last 10 years, the banking system has been reformed, and they have $2 trillion in reserves, Wyke said.
So, is it likely there's going to be wholesale abandonment of infrastructure investment in China? No.
While Wyke has backed off from his stance last June that gold could reach $5,000 an ounce over the next few years as a refuge from inflation, he still expects the precious metal to show stronger gains in the second half of 2009 if the dollar falls and inflation fears mount.
If you saw the dollar resume its fall and maybe toward the end of this year you started seeing people worried about the inflationary consequences of U.S. government policies, then gold prices could move up very sharply, Wyke said.
In the next 12 months, if that were to happen and the dollar were to fall, a gold price of $2,000 an ounce is quite likely.
Spot gold, which was trading at $937.20 around 0835 GMT (4:35 a.m. EDT) on Monday, has risen 6.6 percent in 2009 as investors seek a safe haven of value amid the global slump.
Schroders' gold and metals fund was up 6.15 percent this year at the end of February, Wyke said. At the end of January, the fund was worth nearly $61 million, and is down 34.3 percent since its launch in July 2008.
The Reuters-Jefferies CRB index .CRB, a global commodities benchmark of 19 commodity futures, closed at 209.59 on Friday, down nearly 9 percent for the year.
As of January 30, Schroders' gold and metals fund was 68.7 percent futures, 23 percent swaps and exchange-traded funds, 3.7 percent cash, and only 4.6 percent equities.
Wyke likes companies with pure exposure to single metals, such as Canada's Uranium Participation Corp (U.TO: Quote) -- a fund which held about 4.5 million pounds of uranium as of end-February.
They tend to be companies with the highest correlation possible to the spot price of an individual metal, Wyke said.
We don't hold the big diversified stocks, so we don't hold things like BHP, he said, referring to the world's biggest mining group, BHP Billiton (BLT.L: Quote) (BHP.AX: Quote).
(Editing by Ben Tan)
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