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BMO Analyst Predicts Continued Upside to Commodities, Gold and Stocks in 2010

BMO Analyst Predicts Continued Upside to Commodities, Gold and Stocks in 2010
By Doug Hadfield, resourceINTELLIGENCE TV.

In its updated report on global commodity strategy, BMO Senior Commodities Analyst Bart Melek lauds stimulus packages around the world as stemming “possible depressing and massive deleveraging and panic selling”.

These international efforts led global commodities markets to perform far better than could have been predicted at the start of the year. Base and precious metals and energy commodities performed “extremely well”.

“Lead jumped some 180% from its low, copper is up 150%, zinc jumped 132%, nickel is up about 80% and oil is up just over 120%. Canadian metals stocks surged 440%, while energy equities and the broad market jumped about 60% from the bottom. Gold jumped about 70%, silver jumped 115% and platinum surged 95%.”

Melek pins praise squarely on government stimulus packages in China, the US and Europe in particular, totaling some $2.2 trillion. Zero percent interest rates and central bank liquidity measures also helped to create a recovery environment — largely improved global demand for metals and energy.

Additionally, Melek says a weak US dollar and supply chain issues pushed investor interest in commodities to unexpected highs.

In an interview with Melek on Wednesday, he said his outlook for the year had changed surprisingly little since his last report in October 2009. “The numbers are basically the same,” he commented.

The weak dollar and strong recovery has not only sent investors to higher risk commodities, but also to gold, which should have continued upside. India’s 200 tonne gold purchase and Barrick’s closing of its hedgebook contributed to the bull market, and although strong employment numbers from the US have led to a drop in the price of gold recently, a possible gold price of over US$1,300/oz is BMO’s “bull case” scenario for 2010.

There is however some risk that gold may see further downside should premature Fed tightening occur. For example, any increase in the interest rate could rally the dollar and further hold back inflation, both of which are said to have contributed to gold’s rally.

The Best is Yet to Come

The strength of the demand rebound is a global phenomenon says Melek, but the real good news is yet to come: the full impact of the US government stimulus is still months away.

Of the US$787 billion allocated for the American stimulus program, “only 20–25% has been spent so far,” Melek says. “Much more is to come by the end of fiscal 2010… with maximum impact in Q4/09–Q2/10. BMO Research calculates an additional US$178 billion will go toward various expenditure programs and an additional US$100 billion will be spent on tax initiatives.”

The result is that the US may see a “massive 6.5% swing” in growth in the second half of 2009. The same sort of growth may be seen in China and Europe.

Melek advises investors to “look for signs of sustainable economic growth and positive developments in global export and steel markets as signals for better times to come for material based equities.” With so much stimulus having a positive effect around the world, low supplies of some metals and few signs of production growth, “prices could move higher into 2011.”

And if that fails, gold as a hedge is still a likely boon.

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