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Credit Agricole Looks For Stronger Base, Precious Metals In 2011

Base metals should benefit from global economic growth in 2011, while precious metals remain underpinned by uncertainties such as sovereign indebtedness and government attempts to “inflate away” debts through currency debasement, said Credit Agricole CIB in an annual metals outlook Tuesday.

Global GDP Growth Expected To Boost Base-Metals Demand

The bank looks for growth in global gross domestic product in excess of 4% next year, which should mean further supply strength in base metals, with “supply-constrained” metals such as tin and copper likely to benefit most, said the report.

“The launch of physically-backed ETFs (exchange-traded funds) could be the game changer, opening up the market to a new investor audience seeking ‘hard assets,’” said the report from Robin Bhar, Credit Agricole’s senior metals analyst.

He looks for copper to average $9,750 a metric ton in 2011, compared to $7,481 for the year to date. The bank’s 2011 forecasts for other base metals (2010 to date in parenthesis) include aluminum, $2,575 ($2,165); nickel, $24,500 ($21,734); zinc, $2,475 ($2,153); lead, $2,525 ($2,136); and tin, $27,500 ($20,202).

Forecasts for 2012 include copper, $10,500; aluminum, $2,900; nickel, $26,000; zinc, $2,700; lead, $2,850 and tin, $31,500.

Copper consumption could grow in excess of trend rates, driven by the developing world’s industrialization and urbanization, with overall demand likely to be further boosted by a restocking of depleted manufacturing supplies, Bhar said.

“Supply constraints at existing mines and delays to new mining projects could reach chronic levels during 2011-12, while the potential for short-term disruptions is now an endemic feature of the market,” said the report.

Meanwhile, the risk/reward has “improved considerably” in aluminum, Credit Agricole said. The metal is on course to register global demand growth of more than 20% this year, compared to the 8% fall seen in 2009. Since the 1970s, the copper price has traded 1.5 to 2 times that of aluminum, but is currently 3.8 times more expensive, the bank says. This may mean aluminum substitution makes inroads on copper.

“We expect tin to be one of the star performers in 2011 even eclipsing copper in terms of price out-performance,” Bhar said. For years, prices were low and did not provide an incentive to invest in new mines, the report said. China and Indonesia, the two largest producing nations, are struggling to maintain exiting output. Thus, if tin demand is healthy in 2011, the supply chain “will be stretched even further next year,” Credit Agricole said.

Supplies are more abundant in nickel and zinc, the report said.

Precious Metals To Rise, With Silver, Palladium Outperforming

Precious metals prices should continue to rise in 2011, building on this year’s strength. While gold will be supported by “persistent uncertainties,” palladium and silver will outperform, Bhar said, with palladium as the best performer in 2011 for all precious metals.

Silver and palladium will benefit from recovering industrial demand because of expected stronger global growth in 2011. Bhar estimates silver’s average price at $29 an ounce and palladium’s at $775 an ounce in 2011, compared to $19.90 and $518 for 2010 to date. In 2012, he pegs silver’s average price at $25.50 and palladium’s at $950.

ETF demand for both metals will help drive demand, particularly for silver, as “investors view silver to be in a win-win situation under most scenarios,” he said. Silver will have its gains capped by greater supply coming on line because of restarts at idled base metals operations and higher scrap recovery rates.

Palladium, however, will see support from concerns about supply, especially when considering the supply from Russian stockpiles. Finally, he said, palladium will benefit from being a much cheaper alternative to platinum.

Bhar sees gold prices averaging $1,450 an ounce in 2011, up from $1,221 for the year to date, and $1,275 in 2012. Uncertainty over global growth fragility, sovereign indebtedness, and government policies to “inflate-away” such debts through currency debasement will underpin it. “Gold’s role as a portfolio diversifier is likely to expand considerably in 2011,” he said.

Platinum prices are also expected to rise in 2011. Bhar pegs the average price at $1,765 an ounce and $1,900 in 2012. Investment demand, a rebound in auto sales and other industrial usages will support demand. Furthermore, mine supply will remain very limited.