10 December 2008

Trend of gold as store of wealth 'may start to snowball'--ScotiaMocatta

Deep-rooted global financial problems will escalate the demand for gold as a safe haven.
Author: Dorothy Kosich
Posted: Wednesday , 10 Dec 2008


In its December Metals Matters report, ScotiaMocatta suggests that global financial problems "seem so deep rooted that demand for gold as a safe haven is expected to escalate."

On silver ScotiaMocatta advised, "Investors remain key to silver's fate, but its monetary attributes should keep investment demand strong."

Their analysis also noted that low PGM prices, especially for palladium, are "likely to rebalance the PGM markets before too long-thus providing long term investment opportunities.


Although ScotiaMocatta remains bullish for gold "we are concerned that gold prices are not considerably higher given the current bullish climate. "

"We see two possible reasons for this. Firstly, funds and investors have been in liquidation mode and industrial commodities have been hard hit. As gold is a component in commodity baskets, which were popular investment vehicles in the commodity boom, gold has been sold as investors have sold their commodities. "

"Secondly, gold has traditionally been bought for a ‘rainy day' and many hedge funds and other institutional investors have indeed been having a ‘rainy day,' according to ScotiaMocatta. However, as central banks' measures to tackle the financial rout start to work, the level of redemptions is likely to slow and that should provide less selling pressure in gold."

ScotiaMocatta's analysis revealed that gold lease rates have been soaring and "likely to put an end to the gold carry trade, at least for a while. With interest rates falling, the profit margin on gold carry trades has diminished significantly. This means that as former carry traders come to the end of their term, gold will be withdrawn from the system and returned to central banks."

"As carry trades are closed the pressure on the spot market will switch from selling pressure to buying pressure," they advised.

If people lose faith in the financial system and their currencies, ScotiaMocatta forecasts "the growing trend in wanting some gold as (a) store of wealth may start to snowball."


As the bullish case for gold and silver revolves around their offering alternatives to fiat currencies, ScotiaMocatta analysts said "we feel that both metals have considerable potential on the upside if the financial system continues to deteriorate. At present, ongoing deleveraging is dragging silver prices lower than other commodities, but once that has run its course, then without that selling pressure, prices may well head higher again."

"The big picture is very confusing, redemptions and dollar strength have weighed on silver prices," they noted. Demand for safe-havens is likely to grow once investors have returned to cash, but then decide too much exposure to the dollar is not a good thing either."

"As such, a return to the $11/oz-$13/oz range seems likely in the months ahead," ScotiaMocatta advises.


The auto industry is in the doldrums, which "bodes ill for PGM demand," the analysts said. "However, low prices are also impacting supply across the board, including mine output, sales from inventory and scrap supply, all of which will help offset the fall off in demand."

"Despite the poor demand profile, investors in the PGMs have generally held on to their holdings. The main change has been in the palladium ETFs that saw 53,425oz of redemptions, a drop of 7.3%."

ScotiaMocatta's research suggests "the investor/speculative side of the market is comfortable being long, but not bullish enough to markedly increase exposure. It also suggests that inventors are once again starting to favour platinum over palladium to some extent."

Confidence is likely to return slowly "and these relatively low PGM prices may be seen as good longer term buying opportunities. This is especially so as low prices are now causing producers to make production cutbacks and reduce expenditure on expansion projects," the analysts concluded.


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