Choppy times ahead for gold in near term - BMO's Melek

While gold may be vulnerable to a near-term pullback, BMO's Bart Melek believes there are long-term motivations to hold the precious metal.

Author: Dorothy Kosich
Posted: Wednesday , 24 Jun 2009

RENO, NV -

Choppy times are ahead for gold in the near-term, BMO Capital Markets Global Commodity Strategist Bart Melek warned Tuesday.

"Less ‘trash talk' surrounding the U.S. dollar, higher real long treasury yields, poor jewellery sales and improving equity markets are currently working against gold," Melek said. "Taking all these factors together, BMO Research expects gold to trade near current levels, with some downside risk."

Melek forecasts that "gold is likely to remain range-bound near $925/oz for the balance of the year."

In his analysis, Melek suggests, "Gold may be vulnerable to near-term pullback and investors may want to take profits before addition to positions at lower prices."

Nevertheless, Melek believes there are motivations to hold gold rising long term. "Notwithstanding any possible short-term correction, gold's impressive seven-year run is expected to continue well into 2011. Inflation concerns are likely to heat up once U.S. growth and monetary velocity start recovering."

"Gold typically leads inflation by 12-18 months, so investors would be well advised to look toward improvements in monetary aggregates as leading indicators of inflation and higher gold prices. BMO Research expects higher trend inflation over the longer term."

In his research, Melek asserts "central banks could be very gold positive."

"In addition, central banks around the world will likely put more gold in their reserves," he suggests. "Russian central bank authorities have already stated that future current account surpluses will be allocated toward gold purchases."

"Even more importantly, China has been acquiring gold in its official reserve. ...The fact that China has boosted its gold reserves is very material for the precious metal and currency markets. This may mute any possible correction, as there is likely a large buyer waiting in the wings," he advised.

Meanwhile, Melek forecasts a strong commodity market, along with rising prices in the latter part of this year "when aggressive monetary and fiscal stimulus programs in China, the U.S. and elsewhere move global commodity demand into positive territory."

Improving demand and modest supply growth should lift copper, zinc, nickel, iron ore and oil, he suggests. "Even aluminum should benefit, but it will likely be capped by massive inventories and excess capacity," Melek said.

BMO also advises, "A turnaround in commodity-based stock valuations and earnings multiples should also accelerate once markets start seeing better economic times ahead and firmer commodity and gold prices. This is expected to occur sometime in the latter part of 2009."

"Investors should look for signs of an economic acceleration, positive developments in global export and steel markets as signals for better times to come for material-based equities," Melek recommends.