Go short gold, long nickel - Barclays
The bank expects 2014 to be another tough year for commodities but sees good things to come from a move out of structural surplus.
Posted: Thursday , 19 Dec 2013
GRONINGEN (MINEWEB) -
2014 is likely to be another difficult year for Commodities, writes Barclays, in a note out earlier this week. But, it expects base metals to out perform both oil and precious metals in the early parts of the year.
The main reasons for this are twofold. Firstly, on the base metals side, Barclays expects 2014 to mark the end of a period of structural surplus that has afflicted base metal markets to a greater or lesser degree since 2007/2008.
"Markets such as aluminium and lead are expected to move into deficit, while surpluses in nickel and zinc are likely to shrink dramatically. Even in copper, the one exception, where we expect supply to grow faster than demand, the surplus next year is likely to be very modest indeed," the bank writes.
This, Barclays says is primarily a result of an acceleration in demand growth that is currently running at an annualised rate of around 8%, which it points out is double the level of the first quarter of 2013.
"Meanwhile, a combination of production cuts (aluminium and nickel), declining output from established mines (zinc) and a slowdown in investment (copper) means that supply growth has either already peaked or will do so at some point in 2014."
And, while it warns that there remains a great deal of inventory overhang in many industrial markets and a great deal of volatility is expected, "For the first time in a several years, price risk could return consistently to the upside in base metals and start to be more appropriate for buying the dips rather than selling the rallies, as has been the case for most of 2013."
On the precious metals side of things, fundamentals play a much smaller role curently, Barclays says, which is the second reason why it favours base metals.
According to the bank, the big shift taking place in gold has more to do with the ongoing deterioration of the macro-economic environment, than it does with the fundamentals of supply and demand.
Fed tapering and a general reduction in liquidity are the big game-changers in these markets, Barclays writes, adding, "Although a weaker macro-economic environment for gold has been at least partially priced in following the 27% decline in prices since the start of the year, the risk is for further price downside ahead."
The main headwind facing gold, the bank says is that, with soft demand out of India, the "physical market is struggling to offset investor liquidation, even during recent festival seasons when physical demand is usually strong".
And, it adds, because investors have accumulated significant amounts of gold at around the $1,000/oz level, "liquidation is likely to accelerate should prices look like breaking below this point.
In the silver market, Barclays writes, because of strong production and a weakening of retail investor interest, " despite the prospects of better industrial demand, we believe surplus supply and the vulnerability of investor demand mean that there is substantial downside risk to prices.