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-- Posted Monday, 7 March 2011 | | Source: GoldSeek.com
There is more to the periodic table—and to investing opportunities—than gold, silver and copper. Siddharth Rajeev, vice president and head of research at Fundamental Research Corp., sums up the market prospects for rare earth elements (REE) and a host of metals in this exclusive interview with The Gold Report.
The Gold Report: Sid, today we're going to talk about a number of different metals: gold, silver, vanadium, copper and rare earths. Could you handicap each of those metals for us, starting with gold, copper and silver?
Siddharth Rajeev: Let's look first at the factors that have been driving up commodity prices. We think two key factors are responsible. Number one is increasing global demand; the second is the continued weakness in the U.S. dollar.
Let's look at increasing global demand. We believe in the Brazil, Russia, India and China (BRIC) story and we expect continued growth from those countries. We believe that the U.S. economy will continue to see a gradual recovery. So, we expect increasing demand from the U.S. and continued demand growth from the BRIC countries to keep the demand side strong. Thus, the first factor looks good for the commodities market.
However, we expect the second factor, which is the U.S. dollar, to gradually improve with respect to other currencies as the U.S. economy improves. That should have a negative impact on the commodities market.
So, we expect to see some sort of correction this year. For example, copper is at $4.45/lb. We do not think these prices are sustainable in the long term and therefore we expect to see some kind of correction.
In terms of gold, we believe that as the U.S. economy recovers and the U.S. dollar strengthens, investors would move away from safe-haven assets such as gold and put their money where it could achieve higher returns. So, over the long term we expect the gold price to soften. But, in the near term, uncertainty regarding the U.S. and European economies and inflationary scares should give us high gold prices.
As to copper, we don't think it's sustainable at such prices over the long term. Even though demand looks very strong, we expect prices to drop with the gradual recovery in the U.S dollar.
Silver is unique as it behaves like a capital preservation asset, such as gold, as well as like a commodity due to its industrial applications. The uncertainty in the U.S. and Europe and inflationary pressures, combined with continued demand growth from Asia and the BRIC countries, are some of the reasons we think silver has been one of the best movers recently.
Although we think silver should soften in the long term, we think that silver should stay strong in the near term due to the same reasons as gold. In our valuation models, we use a long-term (2014+) price of US$18.35/oz.
TGR: What price are you using for gold price?
SR: We use a long-term gold price of US$1,000/oz.
TGR: What can you tell us about vanadium and rare earths?
SR: Unlike other commodities, vanadium prices have not been as volatile in the last 18 months. They've stayed around $7/lb. for over a year. Over the long term we have a good outlook on the commodity. We believe strong growth in steel consumption, especially from China and India, will be the key demand drivers. Steel accounts for 90% of vanadium demand; so vanadium demand is highly correlated to the steel segment.
The use of vanadium in battery and renewable energy storage devices is expected to drive the demand up. Vanadium supply is expected to remain quite stable from the three major producing countries—China, Russia and South Africa. We think the demand side should keep prices high.
The main factor driving up rare earth prices is the supply side. China accounts for 97% of all production, and has been cutting down significantly on its rare earth exports. China also has been increasing the demand for rare earths. The U.S. currently imports nearly 100% of its rare earths consumption. We are bullish on REE prices primarily because of the concentrated supply conditions.
TGR: So, the more obscure you get, the better the outlook. There seems to be a bit of a contradiction in that you see softening prices for copper, but strengthening prices for vanadium. Both of those metals have the same sort of investment thesis. Why are you bullish on one and not so bullish on the other?
SR: That's because copper has moved up by 40%–50% in the last 12 months, while vanadium has stayed pretty constant. For the last 12 months vanadium has been around $7/lb. It has not really moved up, while copper has moved up significantly. So we think copper will have a higher price correction.
TGR: What would have to happen in the Middle East before you would be willing to be bullish on the gold price?
SR: Obviously the turmoil in the Middle East is positive to commodities such as gold and oil. But, we think those factors are short-term catalysts. Over the long term, we do not think these incidents should play a role. Historically, all of these geopolitical tensions around the world cause sudden and short-term spikes in prices. They've not really had an impact over the long term.
TGR: In the 1970s there was an oil crisis that lasted about five years that paralleled a run in the gold price. Five years is pretty long term.
SR: High oil prices typically result in high inflation and high gold price. So if the problems in the Middle East somehow impact long-term oil supply, we will see high gold prices for a prolonged duration. We have not seen anything so far in the Middle East that brings up concerns over the long-term supply of oil.
TGR: The other thing to consider is that if a company looks good at $1,000/oz., it will look very good at any price above that.
SR: Certainly.
TGR: To close, what do you see happening, on a macro level, over the next year or so?
SR: Overall, we expect to see some sort of correction in the commodities market with the gradual recovery in the U.S. dollar. Precious metals should stay relatively strong in the near term due to the continued uncertainties in the U.S. and Europe and inflationary pressures.
For investors at this point, because of the uncertainty in the markets and the volatility in commodity prices, the main strategy should be to look for companies with quality advanced stage assets.
TGR: Sid, thanks for your time.
Siddharth Rajeev joined Fundamental Research Corp. in April 2006. At FRC, he oversees the research department, and also covers a broad array of companies, primarily in the energy, mining, and technology sectors. Prior to FRC, he has had a mix of engineering and finance experience including corporate finance experience at a leading Investment Bank in Kuwait. Sid has ranked as a four-star analyst in the energy and mining sectors by Deutsche Asset Management, a division of Deutsche Bank.
Sid holds a bachelor of technology degree in electronics engineering from Cochin University of Science & Technology, and an MBA in finance from The University of British Columbia. He is a CFA Charterholder, and has completed studies in exploration and prospecting at the British Columbia Institute of Technology. Sid is sought by the media for commentary on the valuation of small cap stocks and industries he covers, and is a speaker at various investment conferences. Streetwise - The Gold Report is Copyright © 2011 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part. The GOLD Report does not render general or specific investment advice and does not endorse or recommend the business, products, services or securities of any industry or company mentioned in this report. From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise. Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported. Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734. Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.
-- Posted Monday, 7 March 2011 | Digg This Article | Source: GoldSeek.com
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