>PRECIOUS METALS (CITI)

Precious Metals – Investment Drivers Abate

■ Inflation prospects reducing — We now expect interest rates in major economies to be increasing in 2010, stemming inflationary pressures. High real rates are bearish for gold.

■ USD weakness the main bull point — Resumed USD weakness will be the main source of price support.

■ Gold physical Investment is weakening — In 2Q09 ETF holdings were flat after doubling over the prior 12 months. Bar hoarding, coins, and identified retail investments are all declining. Unidentified investments are increasing although we don’t find this a convincing sign.

■ But paper investments are increasing — Investments in futures and options are increasing, probably as investors become more comfortable with counterparty risk.

■ China the long term bull — Higher prices in more distant years could come from continued growth in China's demand for jewellery and central bank investments.

■ Silver — We believe silver is set to outperform gold given silver has superior leverage to the industrial cycle over gold.

■ Platinum — With the potential restocking in the global auto market and the curtailment of supply, there is potential for the platinum price to break out of the range and approach $1400/oz by year end. We have lifted our price forecasts for platinum and palladium to reflect the improved macro outlook.

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