Commodities | Dec 07 2006
By Rudi Filapek-Vandyck
It is OK to be bearish the US dollar as practically everybody in the market seems to be on one side of the fence again. Standard and Poor’s believes a decline of 5% should be expected for the greenback in the year ahead as Asian central banks will be shifting some of their exposure into other assets and as US interest rates are expected to head lower from mid 2007 onwards.
According to ABN Amro, however, forecasting a weaker US dollar in the year ahead doesn’t necessarily have to go hand in hand with expectations of falling US interest rates. ABN Amro maintains the Federal Reserve Bank will raise further towards the end of 2007. But the US dollar is going south nevertheless, the bank argues.
ABN Amro thinks this is likely to provide precious metals with an extra pair of wings next year which should see the likes of gold, silver and platinum perform much better than their industrial peers who should experience downward price pressure because of slowing economic growth.
The broker notes gold has even outperformed the euro throughout 2006. This is seen as further testament to the metal’s revived role in the monetary system. Where other experts are calling for a top in the EUR/USD cross next year of up to 1.40, ABN Amro economists believe the dollar/euro could surge as high as 1.45 in 2007. Taking a current euro gold price of EUR485/oz on currency conversion alone this would imply a US$705/oz gold price, or further upside of circa 10%.
ABN Amro’s current forecast is that gold bullion will average US$610/oz in 2006 and rise a further 11% to an average US$675/oz in 2007 and 2008. The equity broker does highlight this should be regarded a directional call only because should a US dollar rout eventuate nothing would stop gold from reaching higher.
With OPEC’s intention of supporting a US$60-plus oil price and with the US dollar decline firmly on the oil cartel’s agenda for next meeting, ABN Amro believes investors and gold enthusiasts should also keep an eye on oil for possible extra support.
Earlier this week, analysts at UBS said they expected the EUR/USD at 1.30 by year end and at 1.33 in three months. Apart from the obvious impact on precious metals and other commodities and assets priced in USD, UBS believes the direction of the US dollar is important for what it leads to in terms of investors’ risk appetite.
Any scenario that sees the greenback weakening with little impact on broad risk markets will be generally positive for metals and US dollar denominated assets, the analysts believe.
UBS forecasts gold at US$660/oz by year end and at US$690/oz in three months. This implies the current correction is far from over yet. A point brought forward by market watcher Dennis Gartman as well. UBS expects gold to average US$700/oz in 2007.
