Forecast Season

At the beginning of a new year, it is the time to provide new forecasts for the year just started and to review the forecasts made one year ago. We participated in two surveys in January 2010. Last week, we were informed that we had the most accurate forecast for silver in the annual survey of the London Bullion Market Association (LBMA) and the best forecast for the average cash copper price at the LME in the ThomsonReuters survey.

The 2011 ThomsonReuters survey is not yet completed and published. However, we gave ThomsonReuters an interview, which could be found on their web-site (click here for the interview) about the outlook for copper. The LBMA has already released a summary of the 2011 survey on its web-site (click here for the pdf-document), but a more detailed report will be published later this month in their publication “The Alchemist”. There you will also find the arguments for the forecasts of the various participants in the poll.

All in all, we expect that precious and base metal prices will be higher at the end of 2011 compared to the start of this year. However, in now almost 25 years of professional forecasting market developments, we have seen many occasions that the short-term move were opposite to the longer-term forecast. But by the end of the forecast period, markets often came close to the level forecasted. Thus, we are not worried by the correction in metal markets last week. Nevertheless, we are very well aware that many recipients of longer-term forecasts expect that a market has to move in the right direction immediately after the forecast has been made to regard it as a useful forecast.

After the rally in the second half of 2010, many commodity markets were already heavily overbought and thus, they were susceptible for a correction. Two factors triggered this correction last week by leading to a stronger US dollar. First, the US manufacturing index came in at 57.0, which was above the market consensus of economists looking for only a marginal increase to 56.7. This improvement of the ISM manufacturing index has been viewed as an indication that the expansion of the US economy would accelerate. There was again talk in the markets that the Fed might abandon QE2 earlier than scheduled. Second, the ADP private sector employment estimate sent shock waves through markets. The actual figure of 297K came in almost three times as high as the market consensus. Thus, market participants revised up expectations for the non-farm payroll report. The combination of stronger expansion in the manufacturing sector and a considerably higher job creation lead to speculations that the Fed might hike interest rates already in H2 of 2011.

The market should have been aware that the accuracy of the ADP estimate is very poor. Even taking into account that the official non-farm payroll report appears to underestimate the development of the labor market somewhat lately as preceding months were revised up considerably, the ADP estimate was too good to be true. The labor market report confirmed this, as just 103K new jobs were created in December compared to the consensus estimate of 159K, which moved to around 195K after the ADP report. While the statement of the Bernanke testimony was written without knowing the labor market data, the figures confirmed his assessment. Thus, there is currently no reason to expect that the Fed would change its monetary policy. The purchases of US Treasury paper will proceed as planed. A hike of the Fed Funds target rate is not on the agenda for 2011. This implies that the US dollar would not be supported by higher interest rates. In addition, money market rates as an opportunity cost for holding metals will not provide a reason to sell metals over the medium-term horizon. Therefore, we regard the current correction as an opportunity for investors and consumers to buy metals.