Citing downgrades in global economic activity, Goldman Sachs reduced its 2008 base metals price outlook, advising a stronger U.S. dollar will pressure gold prices lower to an average of $750/oz.
Author: Dorothy Kosich
Posted: Friday , 14 Dec 2007

RENO, NV - Demand concerns and rising supply have convinced Goldman Sachs commodity analysts to forecast a "retrenchment in commodity prices from recent highs, which has already largely occurred."
Noting that base metals are most closely related to the industrial cycle with expected global economic activity expected to decline, commodities analysts reduced their 2008 base metals forecasts, but added they "still expect prices to reach historically high levels in some cases by year-end."
Nevertheless, Goldman Sachs recommended opening a long timespread position in copper.
Meanwhile, the analysts also forecast that a stronger U.S. dollar will pressure gold prices lower next year. "We recommend opening a short position in gold-deferred contracts."
In their analysis, Goldman Sachs asserted that "on a longer-term horizon, structural supply-side drivers have become increasingly supportive to commodity prices. Even as near-term cyclical concerns have led to recent sell-offs in near-dated prices of energy and metals, mounting evidence of further cost inflation surrounding the addition of longer-term production capacity owing to technological challenges, increased government take and rising input costs among other factors have lent substantial support to long-dated prices, pushing five-year forward prices of crude oil, aluminum and copper in particular to record-high nominal levels. We believe that these increases will likely be sustainable, leading us to raise our long-dated price assumptions, which are reflected in our spot price forecasts."
"We believe buying opportunities exist across the commodities complex in 2008, which have become more compelling on recent price declines. As a result, we recommend an overweight allocation to commodities within a portfolio context and suggest specific trades to implement out view in our ‘Top trading recommendations for 2008 list...'"
Goldman Sachs top trading recommendations for next year include a long LME copper timespread of $318/mt with a "buy" on the December 2008 LME copper contract and a "sell" on the December 2010 LME copper contract.
The analysts also recommended a short gold trade with a "sell" recommendation for the December 2008 COMEX gold contract at an opening value of $841/toz.
London Gold: "We continue to expect gold prices to trade inversely with the U.S. dollar given gold's currency-like properties of being a store of value and a medium of exchange. As Goldman Sachs economists continue to expect the U.S. dollar to strengthen on a 12-month horizon of expectations of a narrower U.S. current account deficit, we believe that gold prices will decline to $750/toz, limiting returns from precious metals in 2008. However, structural support provided by stagnant supply growth and demand from consumers, central banks and investors will likely keep gold prices at historically high levels.
12-month gold price forecast: $750/toz
London Silver: "Silver prices continue to track gold prices tightly and are also expected to decline in line with gold prices."

12-month silver price forecast: $13.70/toz
Copper: "Downward revisions to U.S. and Chinese economic growth forecasts have lead us to modestly lower our expectations of copper prices in 2008. We believe that the greater-than-expected weakness in the U.S. economy and stricter Chinese inflation targeting policies will likely weigh on copper demand growth in 1H2008, giving copper inventories a chance to build moderately. As a result, we believe that copper prices will decline modestly until mid-2008 and that backwardation will remain muted. However, inventories are still expected to remain at historically low levels at the same time that a recovery in demand growth during 2H2008 is expected to outpace piecemeal supply growth. We therefore believe prices will regain upward momentum during 2H2008, reaching historically high levels by year end."
12 month copper price forecast: $9085/mt
LME Nickel: "Downward revisions to U.S, and Chinese economic growth forecasts have led us to modestly lower our expectations of nickel prices in 2008. These demand concerns come on top of an already softer nickel balance owing to an influx of Chinese ferronickel supply as well as substantial demand substitution out of nickel in response to high prices earlier this year, which have led to large buildings in nickel exchange inventories. We expect prices to regain positive momentum during 2G2008 as demand begins to recover globally and expected supply growth slows."
12 month nickel price forecast: $28335/mt
LME Zinc: "Similar to the rest of the base metals, we have lowered our expectations of zinc prices in 2008....However, an expected re-acceleration in economic growth later in the year and a slowdown in supply growth given that mine reactivation/expansion opportunities both in China and in formerly idled mines elsewhere have likely been exhausted, will likely renew upward price momentum during 2H2008.
12 month zinc price forecast: $2535/mt