One of the best performing markets in 2010 has of course been commodities, with many sectors developing strong bullish trends, particularly in the metals complex, with gold, silver platinum and palladium amongst the star performers, all of which I have been forecasting as good long term holds since early in the year. In fact in the case of silver, I was advising readers to buy as a long term investment when the metal was trading in the $12 per ounce region back in 2008, and since then we have seen the industrial metal hit a high of $30.69 per ounce earlier in the month. The exception to this has been crude oil, which has consolidated sideways for much of the year, only to finally break out in the last few weeks and start to head higher. So what are my thoughts on these markets as we come to the end of 2010 and look towards 2011, and which are likely to be the star performers next year.
The first thing to note is that many commentators and analysts have been surprised at the positive correlation between the US dollar and gold, having traditionally been an inverse one, with gold rising as the US dollar falls and visa versa. The logic behind this relationship was generally based on the premise that gold is considered the ultimate safe haven, with investors moving assets into a ‘hard’ currency, and away from paper based currencies when confidence is low. However, for much of this year we have seen this correlation invert, with the two now correlating positively, so should we be surprised, and is this relationship likely to continue next year?
To answer my own question, I see this relationship strengthening further next year, driven primarily by the concerns in Europe over sovereign debt and the possibility of a banking collapse, and as such this is likely to continue to drive investors towards the ‘safe haven’ status of both gold and silver as a result, and diversify away from the euro and into hard metal assets. Silver of course is not strictly a precious metal, but classified, and trades as, an industrial one, but nevertheless, with silver ingots, coins and other ‘investment grade’ products widely available, in the minds of investors it is generally associated closely with gold. Indeed to add further weight to this view, in the last few days we have seen the Moody’s rating agency downgrade Ireland to a Baa1 rating from the previous Aa2 rating, adding further concern over the EU project. This follows the recent statement from Moody’s that Greece and Spain are also now under review and may be downgraded in due course, adding further pressure to the beleaguered euro, if any more were needed! So in summary, I see another strong year for gold and silver in 2011, with the precious metal reaching a possible high of between $1578 and $1645 per ounce, creating a pull through effect in silver, which may see the metal breach the $41 per ounce level later in the year. For those of you who are looking for an interesting trade, the XAU/EUR pair could be an interesting one, which could profit two ways as gold strengthens further and the euro weakens, so a double whammy!
Finally, what are my thoughts on the energy complex, and in particular for oil, and to cut to the chase, I am heavily bullish on crude oil next year, short and simple. If we take the technical picture first, in the last few weeks we have finally seen oil break above the resistance created in the $87.14 region, and move higher to currently trade at $88.70 at the time of writing. As a result of the long consolidation phase of this year, we now have a deep platform of support in place, which should now provide the springboard for a sustained break higher. On the longer term monthly chart, we are now trading above all four moving averages and with only minor resistance now ahead, we should see a run towards the psychological $100 per barrel in Q1 next year. Once past this level, the way is then open for a longer term trend to develop, and I fully expect to see crude oil breach the all time high of $147.27 in the longer term, supported by the fundamental picture. Indeed only last week the IEA revised their forecast for global oil demand, adding a further 260,000 bbl/d to the figures, or an increase year on year of 1.6%, which also closely aligned with OPEC’s own forecast of an uplift in demand of 1.3%. In addition last week, the oil inventory report showed a draw of almost 9.9 million barrels against a forecast draw of 2.7 million barrels which surprised the markets being the largest drop in almost 8 years. So in summary, we could see an explosive year for crude oil prices in 2011, and certainly one to add to your watch list of commodities to trade with a longer term buy and hold strategy in the energy complex.
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great article over all. only problem is china coming into the market with a rate raise. and if investors are happy with the euro bailout packages economy is more likely to improve resulting in a weakened appetite for commodities metals atleast.
Hi Saad – many thanks for your kind comments and yes I agree this is certainly an issue which we need to keep a close eye on – the recent rise in rates certainly spooked the markets, but mainly because it came as a surprise which the markets hate. With regard to Europe, I believe we have some way to go before we are out of the woods, and there may be more shocks to come. Indeed this morning there have been further rumours that Portugal is likely to be downgraded soon – we shall see, but many thanks once again and as always the markets will decide in due course – regards Anna