St. LOUIS () -- With recent and steady declines in gold to under the $600 mark, bulls and bears continue to clash on the future of the yellow metal and other commodities. On September 08, gold was trading at $611.50 only to fall to $597.10 on Monday September 11. Since the fall to the sub-$600 level, prices have failed to break the barrier, trading as low as $578 on the 15th, and trading at $582.50 today.
Merrill Lynch remains bullish, saying that a commodity super-cycle is still underway. Merrill analyst, David Hall, expects commodity prices to strengthen from China demand in the next couple of months with focus on copper, fear of mining strikes and increased demand as summer Holidays near an end.
Hall said that in the long-term, the cycle will be primarily driven by Chinese urbanization and industrialization, with India following suit. Hall added that not every year would be an "up year" and that there is potential that 2007 could be one of the "down years."
In the latest edition of The Gold Monitor, Martin Murenbeeld, Chief Economist of the Dundee Group of Companies, said "It follows that the gold bull has to be patient. We had put a $575 lower limit on the narrow risk range in recent weeks, and while we didn't specifically expect it to be broken, it was within the range of our thinking."
Murenbeeld also said that a number of positive outcomes loom for gold in the next three months. For one, the Iran uranium enrichment dispute has not yet been resolved, and secondly, the dollar is overvalued, saying "The IMF meetings over the next few days and the necessity of a ruling on whether China is manipulating its currency by the U.S. Treasury in November have potentially negative consequences for the Dollar."
According to an article by The Star, Rob McEwan, current U.S. Gold president is sticking with a five year boom prediction that sees gold hitting $850 by 2008, and $2,000 by 2010. McEwan stated that he didn't know where the floor is, however that in the long run he is "outright bullish" according the article.
"I still see a positive trend in gold but it never moves in straight lines," McEwan said, "It just means it's a good time to buy."
Dale Doelling, of Trends in Commodities, today told CBS MarketWatch, "Only the eventual meltdown in the stock and bond markets...would be the event that would not only halt the slide in the metals complex, but provide the catalyst for a monumental rally in these markets."
Peter Grandich, Editor of the Grandich Letter also said, "Gold is bouncing thanks to a deeply oversold condition."
"The difference now is traders are looking to sell rallies versus buy dips," he said, adding that "gold will need to close above $610 to confirm the recent big slide was indeed just a correction."
Steven Roach of Morgan Stanley lays out a number of points in support of a commodities downturn, found here.
- Chinese Producers
- U.S. Housing Market
- Asset Allocation Call
For the case of China, Roach points out that the aggressive growth and insatiated raw materials demand from 2002-2005 may be slowing down. To combat the growth, a tightening of monetary policy has been set in motion to slow down a number of high growth sectors with large focus on building materials such as steel, aluminum, concrete, coal, etc.
Numbers point to industrial output reducing, up 15.7% year to year in August, however being up 18% in June and July. Fixed investments were up 21.5% in August, but up 30% per month for the first seven months of 2006. Although this data is just from a few months, if further deceleration continues into the 12-13% range, then reduced commodity demand is almost a certainty, Roach said.
Roach's second factor is the U.S. housing market, stating that post-housing bubble shakeouts are detrimental to commodity demand. Roach said as the bubble bursts, "The wealth effect could well work the other way as consumers elect to rebuild income-based saving rates, which have fallen into negative territory for the first time since 1933."
Roach's third factor deals with commodities garnering the attention of the mainstream investment world. The Commodity Trading Advisors currently have over $70B under management, triple the amount from a few years back. With the influx of investment houses adding commodities divisions and with retail investors jumping onto the wagon, essentially the nature of commodities as a once risky and avoided market, is becoming increasingly mainstream. With the influx of popularity, prices will be affected when market and investment plays enter the realm as no longer will physical supply and demand be the sole determiner of prices.
Roach said in his report, "I am not looking for a crash in commodity markets. But as China slows and the US property bubble bursts, a broad and protracted downturn can be expected in most economically-sensitive commodity markets, including oil. Investor involvement in these markets can only compound the downside."
Andy Xie of Morgan Stanley market analysts should be careful not to compare the U.S. and China lifestyles too similarly when making judgments, "The U.S. has this suburban lifestyle and 70% of the energy in the U.S. is consumed by transportation. In China over 70% of the energy is consumed by industry. So we have a totally different story."
And although not necessarily fully bearish, Michael Jalonen, of Merrill Lynch lowered the 2006 price forecast from $650 to $625, leaving the 2007 gold spot price at $675.
Peter Brooke, and Equity Strategist at Old Mutual Asset Management said in an interview that "...You need to have a balanced portfolio. You need to have maybe a little bit of gold, but you also want to have offshore assets, you want to have bonds, property, cash etc because if you are just sitting on a gold fund, it is too wild a ride."
Both the school of the bull and that of a bear have a number of reasonable arguments. The next few months may determine whether it is a year of the bull or of the bear for commodities.