'Gold-en' times may endure as dark days loom over commodity markets

MO's Bart Melek observes investors are migrating into cash, government paper and gold at the expense of industrial commodities and equities.

Author: Dorothy Kosich

RENO, NV - 

While safe-haven buying has lifted gold to historic highs in recent weeks, BMO Capital Markets Global Commodity Strategist Bart Melek cautioned Tuesday that a correction may be coming before the rally resumes.

The picture is bleak as Melek warned "it looks quite probable that base metals and bulk commodities will be under siege for the first nine months of the year."

"With investors continuing to be quite risk averse through the worst of the recession (which is likely to stretch into Q4/09), base metals, bulks and mineral equities are expected to remain relatively lackluster-but ready to move to the upside," he added.

In his analysis, Melek observed that the $200 per ounce rally of gold to just over US$1,000/oz last month "suggests that the good times for gold may continue into 2009."

However, he warned, it may be choppy near term for gold, noting "there is a risk that prices may correct somewhat in the near term if there is a return to relative stability in the financial market, particularly the financial sector."

"Gold appears to have run ahead of its main drivers: the U.S. dollar is strengthening and disinflationary risks are growing in the short run. It is possible that gold will retrench materially below US$900/oz, before trending up toward US$1,000/oz later in 2009."

Despite Melek's prediction of "more dark days before commodity markets turn," he also forecasts a turnaround in commodity-based stock valuations and earnings multiples will accelerate "once markets start seeing better economic times and firmer commodity and gold prices. This is expected to occur sometime in the latter part of Q2/09."

"Investors should look for signs of an economic bottom, developments in seaborne trade and an end to downward price pressures as signals for better times to come for material-based equities," he advised.  "Stocks on average tend to rebound well ahead of a real economic recovery and improvement in earnings."

Melek asserted the commodities correction seems overdone, and claimed the credit-lead commodity sell-off "has left metal prices too low." He suggested that the market for many bulk and metal commodities could operate in an "auction-pricing" mode again, as opposed to a "marginal cost" mode under a balanced situation if demand materially outpaces supply.

"It is easy to envision metal prices testing recent cyclical highs if supply growth is destroyed by the credit crisis and low prices," he predicted.