Gold could surge to US$2,500 per ounce or higher by the end of 2011, according to J.P. Morgan commodity analysts Colin Fenton and Jonah Waxman.
Before Standard & Poor’s downgraded the United States’ debt rating, they thought spot gold could average US$1,800 by year-end. Now that view looks too conservative, the analysts told clients.
They also see a lot of upside for raw sugar prices, possibly doubling or more in a spike as a result of weakness in the U.S. dollar and rising inflation.
They analyst recommend owning commodities geared toward Asia, investment and inflation, while being underweight those tied to the United States or consumption.
“In the near term, most commodity markets appear likely to convulse lower, as a growth scare dislodges physical inventories and impairs orders,” they said. “These fears could linger in the United States, where private funding costs will likely go up and household balance sheets will be further strained.”
However, the analysts expect commodity markets linked to emerging market growth, infrastructure investment and inflation will stabilize relatively quickly, outperforming markets more closely tied to developed markets.
Not only is this trend already evident in the rising gold price since Friday’s downgrade, but also in renewed widening of the Brent-WTI crude oil spread.
The J.P. Morgan analysts favour a basket that includes Brent crude oil, gasoil, gold, raw sugar, copper, corn and wheat. They recommend hedging this risk with underweights or shorts in a group that includes WTI crude oil, RBOB gasoline, aluminum, zinc and North American natural gas.
“Despite the novelty of a US downgrade, a debt-focused scare is normal for this stage of the business cycle,” they said. “The macro backdrop better parallels mid-cycle pauses in 1995 and 1998, rather than end cycle 1981 or 2008, though the risk of a worse outcome is rising and should not be ignored.”
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