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LBMA Conference - bullish on gold but terrified on dollar

by Rhona O'Connell, Mineweb.net

Asked by John Reade, in his anchor leg role on the Conference podium, to forecast the gold price at next year's LBMA Conference (late September 2010), the average forecast among this year's Conference delegates was $1,183/ounce,(a gain of 12% in dollar terms. 

Last year the forecast for today's price was $956.50, which is perhaps a sobering thought for those of us to profess to have crystal balls.  We were not asked to project a dollar exchange rate as such, but not surprisingly 63% of delegates thought that the dollar would be weaker next September than it is now.

Roughly 29% of the votes cast on the gold price were in a broad band between $1,150 and $1,200.

The overwhelming sentiment at the Conference was bullish and while there were a few voices of caution, notably with respect to the problems in the jewellery and manufacturing industry as a result of the performance of the gold price over the past year or so, the majority of delegates who expressed a view are of the belief that new investment momentum will be more than enough to overpower the squelching of the jewellery industry as a result of the recent behaviour in the gold price.  That said, 43% of the delegates were from the banking industry.

A key question is not so much "Where", or Who", but "Why?"  The Where and the Who are identified as the professional investing classes, as well as the increased roll-out of ETFs across the globe, the majority of whose investors (both in terms of numbers and gross tonnage, so far) are identified as individuals, to a large extent under the tutelage of IFAs. 

The "Why?" was identified by John Reade in his summation of the Conference as "Inflation". 

He suggested that many of the investors looking to hedge against dollar risk have already done so - a weakening dollar is not yesterday's story, as such, but it has certainly been with us for some time.  Inflationary fears are likely to be the next driver if investors are to come into the market in size and certainly the bankers at the Conference were of the view that come they will.

The dollar story remains pertinent.  Michael Sheehan, Precious Metals Portfolio Manager of Red Kite Investments delivered a paper focused on the platinum market - but that was not all.  As well as the fact that platinum has a strong correlation with the dollar, (sometimes stronger than gold) combined with potential supply disruption (South African costs are becoming prohibitive) and a strong rebound in demand, Mr. Sheehan gave us a strong warning about the structure of US debt and its potential medium-term ramifications.  It was not a pretty picture.

He reminded us that in order to shore up the long end of the market (and thereby give a helping hand to the housing market) the US Government is borrowing at the front end of the curve.  The average maturity on US debt is now down to just 51months and US national debt overall is now at $12 trillion, equivalent to 84% of GDP, close to post-World War Two highs.

This, he argues, is manageable - provided that it is managed properly. 

The skew in the maturity of the debt, however. gives rise to the risk of short-term interest rate rises and the problem is compounded by a drastic fall in budget revenues as a result of the economic contraction. 

The largest contributors to the US government are currently the Social Security Trust and the Heath Trust Fund,  If nothing is done,  he suggests, the latter will have run out by 2017 (that's just eight years away) and the former will be bankrupt by 2037.  The average maturity on US debt is currently 3-5%.  If inflation starts to rise then there is every chance that the interest expense incurred by the US Government will rise faster than revenues.

Hence investors' interest in gold and platinum - they are "terrified about the US dollar".

On those figures, it's not surprising.

Mr. Sheehan was arguing both for gold and platinum.  At the concluding session of the conference, as well as forecasting on average a 12% increase in the gold price from current rates, delegates were even more bullish about platinum and palladium than they were for gold, but mildly less so for silver.

The average price forecast for spot silver in late September 2010 was $18.10, a gain of roughly 11% from present day. Some 23% of the votes cast were for a price roughly somewhere between $17.50 and $18.20.

The blue riband, though, goes to the PGMS, with palladium to take the spoils.  The average forecast for platinum in late September next year was $1,629, with roughly 29% of delegates looking for a price between $1,500 and $1,600, broadly speaking, giving an a increase of 22%. 

Palladium, however, is set fair for a gain of some 48%, with delegates suggesting a price of $475.80 in ten months' time (the distribution here was more evenly spread than in the other metals, with 19% looking for something between $400 and $430 and 20% forecasting a price between roughly $350 and $370. 

Little mention was made at all of the old debate about Russian State stocks of palladium (or lack thereof), but the shift in the auto market in favour of palladium over platinum commanded a lot of attention. Even at the snapshot forecast prices for next year, platinum would still be a premium of over $1,150 to palladium, with a ratio between the two of over 3:1, so for as long as technology lasts palladium is likely to continue to encroach on platinum in the auto sector.

The question for the platinum producers is;  will the rise in prices come soon enough - and will the exchange rate allow enough of it to translate into rand terms in order to stave off more problems?

Mineweb is a web-based international mining publication focusing on mining financial and corporate news and comment.

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