Fundamental Outlook for Industrial and Precious Metals

Fundamental Outlook for Industrial and Precious Metals

By Dirk Masuch Oesterreich

When attempting to forecast the price of precious and base metals getting the fundamentals right is more important than the focus on short term fluctuations. However, traders and investors alike need to be right on the timing of prices to maximize their returns.

Let’s make an attempt at outlining some of the factors to consider:

1. Short term: to get a hold on short term price fluctuations for base and industrial metals inventories at the London Metals Exchange should be watched closely. Tight inventories may indicate rising/high prices for longer than technical levels may suggest. High inventories may lead to lower/falling prices for longer than technical analysis suggests. Gold and precious metals short term fluctuations can be anticipated by observing technical patterns and oversold/overbought conditions, taking into account also the US dollar index.

2. Medium term: the supply-demand outlook becomes more important than short term inventories. Mine life cycles and the number of mines producing and coming online or going offline become important. Seasonal factors must be considered to determine strength or weakness, like the Indian wedding season which increases the demand for gold.

3. Long term: Macrotrends define the long term outlook for base metals, like China’s industrialization. Financial aspects, investment demand, and inflation hedges are important to determine the outlook of precious metals, especially gold.

Some general considerations:

- Commodity prices depend to a large degree on the health of the currency they are priced in. A weaker US dollar requires producers to demand higher prices to compensate for their currency risk.

- The US dollar is now well below its long term support level of 80 level on the USD index. This hasn’t happened before. Nobody knows how deep the water will be. Below 80 is completely uncharted territory, never experienced before.

- Precious metals on balance rose since 2001-2002. PM’s are in a bull market. Gold’s appreciation is likely to accelerate due to financial considerations, inflation concerns, and concerns about the health of the USD and other currencies.

- Gold no longer has an inverse relation to the USD. While these assets moved in almost perfectly opposite directions between 2001 until the end of 2005, gold is now mostly independent from the dollar’s moves due to increasing investment demand. There are now periods when gold and the USD move in lockstep, contrary to each other, or don’t care about each other at all.

- China’s rise to industrialization is one of the megatrends of this century and will continue to drive demand and price pressure for industrial metals and other commodities, including energy. There will be setbacks, but the long term trend is well established.

This list is not complete and important factors may have been overlooked.

Nevada Gold Investor @ http://nevadagoldinvestor.blogspot.com

Servicios HidroGIS @ http://www.servicioshidrogis.com