Saturday, November 28, 2009

>Goldman Sachs : gold still relatively fair value

London - Gold and other commodities are justified at current pricing levels and aren't exhibiting bubble-like characteristics when macro variables are taken into account, a senior analyst at Goldman Sachs (GS) told Dow Jones Newswires.

"Interest rates on a nominal basis have been relatively flat while inflation expectations have been rising, putting downward pressure on real interest rates, which in turn has been putting upward pressure on gold prices," said Jeff Currie, head of global commodities research at the U.S. bank. "So the gold market looks relatively fair valued when you put it in the context of real interest rates," he added in a recent interview.

A combination of a faltering dollar and central banks' diversification away from a high level of reserves in the weakening currency have helped to lift gold to record highs, leading to talk of a developing asset bubble.

Thursday the previous metal hit a new all-time high of $1,195.10 a troy ounce in the European spot market, also aided by investors' desire for insurance against the risks of inflationary bubbles in other assets.

Other commodity markets and especially metals have also moved higher, with copper at 2009 highs and platinum and palladium trading at prices last seen in August 2008. Oil is meanwhile holding a steady range between $74 and $77 a barrel, up over 40% since the start of the year.

Industry players have been scratching their heads as to why prices in some commodities have been so strong given rising inventories, not least copper.

Copper stocks in London Metal Exchange warehouses are now at their highest level since April, with the highest proportion in the U.S., where even producers admit demand is extremely poor. In China too, Shanghai warehouse stocks have risen sixfold since the start of the year. Comex stocks are meanwhile at their highest since August 2004, when copper prices were less than half current levels of around $7,000 a metric ton.

Total U.S. inventories of crude oil and petroleum products are meanwhile at their highest since 1994, federal Energy Information Administration data for the week ended Nov. 20 showed.

Currie said that copper inventories relative to ten years ago are still at "extraordinarily low levels," while in oil "you're swimming in it," adding that the forward curves of both commodities reflect these relative inventory levels.

"On a day-to-day basis you can make the argument that the inter-correlation between the dollar and commodities is very high. On a longer term basis, you can make the argument that energy drives the dollar, but the dollar drives metals and agriculture," Currie added.

Goldman Sachs' top energy pick is oil, with copper the favored base metal. Goldman Sachs meanwhile tips corn out of the agricultural commodities and platinum from the precious metals complex.

"Platinum is a gold-plus trade," Currie said. "It's got a floor on it provided by gold, and then you get the industrial story on top of it, with the continuous improvement in demand for autos against ongoing tight supply dynamics in South Africa," he added.

In the backdrop of the commodities revival is still robust demand from the emerging markets, especially the BRIC countries, Currie said. "The financial crisis was really targeted at the U.S., Europe and Japan, and the other parts of the world are rebounding much more quickly," he added.