Oil Cool, Precious Metals Hot

Chidem Kurdas

Barclays forecasts high but stable-to-slightly-lower oil prices in the next quarter, assuming the Iran nuclear stand-off does not get worse. The reversal of the rising price trend could mean losses for some hedge funds, which have near-record long exposure to crude oil and gasoline futures.

However, if the confrontation with Iran escalates, then prices are liable to spike because the market does not have much shock-absorbing capacity. The funds presumably bet on continued price strength in view of the geopolitical situation.

Larry Kantor, Barclays head of research, says energy prices are likely to remain high and the risk is skewed to high. This is based on an outlook of stronger global growth and no economic hard landing in China. After a temporary dip, oil prices are likely to rise again later this year.

Investor sentiment is another source of uncertainty. In the first two months of 2012 investors put $3.6 billion into energy index products but that was after pulling out money last year. The 2011 selloff was overdone but it shows that investors are skittish about commodities, said Michael Zenker, managing director of commodities research at Barclays.

He sees precious and base metals as having the brightest near-term prospects. Barclays’ forecast for the price of gold is $1850 in the second quarter and $2030 in the third quarter. One trend that may dampen the rise in gold is a possible reversal of the inflow of new capital into gold-backed exchange-traded funds. In January and February $4 billion came into precious metal ETFs, mostly to gold.

By contrast, hedge funds have pared down their positions in gold futures. But some fund managers hold gold ETFs and producer stocks.

Recent price movements in precious metals have been downward. Gold declined while palladium and silver fell on weak manufacturing numbers from China.

 

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