By Chris Shaw

In the view of GSJB Were, the current correction in commodity prices is just that and so investors are being given another opportunity to add to their holdings in the sector.

The broker suggests the re-stocking process in China appears to have run its course for the time being and with the northern summer underway, metal prices should be in for a quiet run for a couple of months until the summer holiday period is over.

But any further downside in metal prices during such a hiatus should be modest in the broker's view and so it suggests using the current weakness to lift exposure on the expectation of relative outperformance over the next 12 months or so.

The broker prefers copper among the base metals but also suggests maintaining an exposure to gold, a suggestion that supports a common argument among analysts that the level of financial stimulus applied around the world in recent months as the world dealt with the global financial crisis could develop into inflationary pressures going forward, which would in turn be supportive of gold prices.

UBS also likes gold, preferring it to base metal exposure at present as it now sees scope for US dollar weakness to continue through 2010 and beyond, which in turn implies higher gold prices. Previously the broker had expected gold would peak some time this year.

To reflect its more positive view the broker has lifted its gold price forecasts in coming years and now expects the metal will average US$1,050 per ounce in 2010, up from its revised estimate of US$950 per ounce this year. Its long-term price estimate has also increased to US$825 per ounce from US$650 previously, reflecting both its revised outlook for the US dollar and profitability issues for the industry at its previous long-term forecast level.

Citi however expects silver will continue its recent trend of outperforming gold in relative terms and so favours the junior metal from an investment perspective as it expects gold will range trade between US$850-$1,000 per ounce over the next 18 months given investment demand appears to be moderating.

In the broker's view the reason for the weaker demand is essentially a shift in investor perception away from a fear of systematic risk back to the more traditional drivers of the potential for a weaker US dollar and concerns over inflation globally given the amount of stimulus injected into a number of economies.

There is evidence to support the broker's view that demand for gold has weakened as it notes in the first quarter of this year while gold mine supply was steady, scrap supply rose 55%, while over the same period jewellery and fabrication demand fell by 24% in year-on-year terms and industrial and dental demand was down 31% on a similar basis.

This weaker demand has allowed the silver price to outperform in relative terms so far this year, a trend the broker expects will continue given there are some early signs of improvement in leading economic indicators. As silver demand has a strong correlation with the state of the global economy this trend is expected to be followed by stronger buying for the metal.

Given such an outlook the broker sees the gold/silver ratio returning to its longer-term average of 55-60 as economic conditions return to more normal levels compared to the current ratio of about 69. Such an outcome would mean the relative outperformance of silver against gold would continue.

The broker has lifted its price forecasts for both metals in coming periods and now expects year end prices of US$900 per ounce for gold and US$13.50 per ounce for silver, up from US$850 and US$12.50 respectively. By the end of June 2010 it expects gold to be at US$1,000 per ounce and silver at US$16 per ounce, up from US$14.70 previously, while its end of 2010 forecasts of US$850 per ounce and US$12.50 per ounce respectively are both unchanged.

With little way to gain direct exposure to silver on the Australian market the broker recommendations related to these views tend to focus on the gold stocks and here UBS prefers Lihir (LGL) over Newcrest ((NCM)) and has upgraded Dominion Mining ((DOM)) to a Buy recommendation.

GSJB Were has Buy recommendations on a number of gold stocks including Lihir and Newcrest while it also likes Dominion, Sino Gold ((SGX)) and Avoca Resources ((AVO)).

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