$1,500 Gold Before Mid-2010–SocGen


"Looking further out to 4Q10 silver carries the laurels in the metals sector overall. . ."

In its latest quarterly Commodity Review, investment bank Société Générale forecasts continued strength in investor flows into commodities in 1Q10, helped by central banks keeping policy rates at extremely low levels. The bank suggests that, not least due to the size of the output gap in the United States, the recently developed fears of an increase in FOMC interest rate policy has been overdone and therefore recommends buying into the latest correction in commodity prices.

The bank's foreign exchange strategists are looking for new lows for the USD against the euro in 1Q10. This combined with the persistence of "exceptionally lax" monetary conditions, high investor cash holdings looking for a home and the secular trend of "long-only" fund managers for diversification into commodities as a hedge against inflation as well as mitigating equities exposure, all point to very strong investor flows into commodities during the first half of 2010.

in SocGen's view, "The market is becoming concerned that the governments of the major OECD countries may put pressure on central banks to keep interest rates low for too long in order to help reduce the huge structural fiscal deficits in real terms (higher inflation would tend to reduce the real fiscal burden)" and we have another recipe for higher exposure to gold.

SocGen therefore expects precious metals prices, led by gold, to rally sharply in the next two quarters and the bank is looking for gold at $1,500 before mid-2010, with the view partly driven by the weight-of-money argument that revolves around gold's relatively small market size by comparison with other asset classes. Other bullish gold drivers include flat mining supply and the expectation for ongoing Asian central bank gold buying.

Looking further out to 4Q10 silver carries the laurels in the metals sector overall with nickel in the vanguard for the base sector (and outperforming gold).

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