Morgan Stanley: Gold, Silver Among Top Commodity Picks For 2013: Cautious On Base Metals

6 December 2012, 9:43 a.m.
By Kitco News
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(Kitco News) - Morgan Stanley lists gold and silver, along with corn and soybeans, as its most preferred commodities for 2013.

The firm also offered upbeat remarks about platinum group metals but described itself as “relatively cautious” about base metals, listing copper as its lone pick in this category.

Morgan Stanley looks for gold to average $1,853 an ounce next year and for silver to average $35. The platinum forecast is $1,715.

“We prefer commodities with structural stories or those facing supply constraints,” the firm said in a 2013 commodities outlook released overnight. “Higher prices in recent years have brought both a supply and demand response, bringing many to call for the end of the commodity ‘super cycle.’ We view this as too simplistic.”

Commodities are cyclical, but the elasticity of supply and demand, as well as the length of the cycle, varies significantly across the complex, the firm said.

“Investors must be more selective, but opportunities abound. With global demand uncertain, supply-side fundamentals, demand elasticity and idiosyncratic risks will prove increasingly important in driving price action. Under this lens, we favor exposure to gold/silver and corn/soybeans. We are modestly constructive crude oil into 2013, but more so in the 2H.”

Morgan Stanley said gold is its “preferred fundamental metal exposure heading into 2013.” The third round of quantitative easing in the U.S. and European Central Bank’s unlimited bond-purchase program are the most important factors for a continuing weak trend in the U.S. dollar, and in turn a key for stronger gold prices in the short term, Morgan Stanley said.

“However, low nominal and negative real interest rates, ongoing geopolitical risk in the Middle East and continued mine supply issues are also supportive,” the firm said. Morgan Stanley said it looks for continued support from central-bank buying and for a recovery in Indian demand as the country becomes more accustomed to higher prices.

Morgan Stanley said silver is a “cheap proxy to gold” and said it looks for the metal to outperform gold in 2013.

Supply-side constraints provide potential support for platinum group metals, Morgan Stanley said, adding that it views supply/demand fundamentals as better for palladium than platinum.

“We have a more optimistic outlook for platinum group metals, as supply issues in South Africa have helped eliminate surpluses in all major PGM markets,” analysts said in their report. “We expect deficit markets to continue in 2013, with upside benefits for prices. Industrial demand remains firm, and supply is constrained by South African labor issues, reduced sales from Russian stocks and lower recycling rates.”

Meanwhile, Morgan Stanley analysts described themselves as “relatively cautious” on base metals due to a “guarded view” of first-half global economic growth and the complex’s strong correlation to global macroeconomic trends.

“The downside risks to pricing are only magnified by a structural oversupply evident in most base metals markets, with the key exception of copper and perhaps lead,” Morgan Stanley said. “Upside for next year may be found in 2H13 as our global economists are forecasting a pick-up in industrial activity.”

Morgan Stanley said copper is “our sole pick in this complex,” forecasting an average price of $8,600 a metric ton. While supply is expected to grow, global inventories are starting from a low base. “We are becoming increasingly positive on the outlook for copper’s key end-use sectors in 2013, especially in China,” Morgan Stanley said.

The firm said the aluminum market is “oversupplied and over-produced,” pegging its forecast at $2,300 a ton. Other base-metals forecasts include nickel, $18,300, and zinc, $2,200.

By Allen Sykora of Kitco News; asykora@kitco.com