Material Matters: Gold, Silver, Uranium, Auto Sales And Cocoa

This story features ENERGY RESOURCES OF AUSTRALIA LIMITED, and other companies. For more info SHARE ANALYSIS: ERA

– Lack of physical demand capping gold price
– Silver forecast to outperform gold
– ERA upgraded following uranium sector review
– Comments on Asian auto sales and cocoa 

By Chris Shaw

Over the past two weeks rallies in the gold price have, in the view of Standard Bank, been capped by physical resistance. This reflects a seasonal weakness in demand in the bank's view, as at prices approaching US$1,440 per ounce physical selling is consistently outpacing physical buying. 

What sets this year apart from 2009 and 2010 in terms of seasonal weakness in the view of Standard Bank is buying is emerging on any price dips, which is helping offset some selling pressure. 

With physical demand weak Standard Bank sees a period where rallies in the price of the metal will likely attract more scrap and other gold selling. But with tensions high in the Middle East the bank now sees fundamental support and value below US$1,370 per ounce, up from US$1,340 per ounce previously. 

Standard Bank makes no changes to its gold price target of US$1,500 per ounce, a level expected to be reached in the third quarter of this year. While there is scope for this target to be reached earlier, Standard Bank expects the current lack of physical demand will cap any rallies for a few more weeks. 

Remaining on the precious metals, Deutsche Bank takes the view the recent re-rating of silver relative to gold is not a temporary phenomenon. Silver is expected to continue to outperform in an environment in which precious metals prices continue to rise over the next two years.

Deutsche Bank sees two major drivers of further gains in silver – one is strong industrial demand, as global growth remains a priority for authorities in coming years. Industrial demand also benefits from silver being a necessary material in several high growth markets, including solar energy, electronics and batteries. 

The other major driver for silver is investment demand in both the western world and emerging markets. This demand is showing signs of being larger than generally accepted, Deutsche noting demand for silver coins has strengthened in recent months as smaller investors view silver as a more affordable alternative to gold at current levels. 

This has meant silver is starting to act more like gold in that investor demand has been a key driver of prices, in contrast to what has been a more cyclical market in the past. The increased interest in silver has seen silver keep pace with gold in periods of risk aversion and outperform when inflationary or currency risks take centre stage. 

As a result the gold/silver ratio has moved lower, with Deutsche expecting the ratio will fall below 40 times in 2011 and 2012. To reflect this Deutsche reiterates the view silver prices could average US$50 per ounce in 2012, while the bank forecasts a gold price approaching US$2,000 per ounce over the same time-frame.

Turning to uranium, JP Morgan notes global uranium stocks are currently trading on a valuation of around US$6.30 per pound of resource. Within this, exploration assets trade for around US$4.27 per pound, producers trade at an average of US$12.75 per pound and developers trade at an average of US$3.29 per pound.

This leaves the uranium sector trading somewhat cheaply compared to historical levels, as JP Morgan notes since 2005 the average valuation of the 23 stocks used in its analysis has been US$8.50 per pound. The broker estimates current market valuations imply a uranium incentive price of about US$65 per pound, largely in line with JP Morgan's long-term price estimates of U$60 per pound. 

The analysis conducted by JP Morgan has led to some changes to models for both Energy Resources of Australia ((ERA)) and Paladin ((PDN)). The result for Paladin is a cut in price target to $4.75 from $5.35, which compares to a consensus price target according to the FNArena database of $5.21. JP Morgan rates Paladin as Neutral, while the database shows two Buys, three Holds and two Sells.

For ERA, JP Morgan has upgraded to an Overweight rating from Neutral previously with a target of $11.60. The upgrade reflects that the stock is now trading at a discount to estimated net present value and makes ERA the top pick in the sector for JP Morgan. 

FNArena's database shows ERA is rated as Buy twice, Hold once and Sell five times, with a consensus price target of $10.76. 

In what could impact on demand for a number of commodities, Barclays suggests tighter monetary conditions in emerging Asian economies could slow what has been a recent acceleration in auto sales in the region.

In the view of Barclays, while wage growth in emerging Asia as been strong, increases in borrowing costs and falling credit availability means tougher conditions for driving further gains in automobile demand.

The oil price could also play a role, as while a temporary increase is unlikely to have a major impact, any sustained increase could see a considerable decline in demand over the coming two quarters.

Barclays suggests the first signs of weakness in auto sales numbers may emerge in April, with the most pronounced impact likely to be in China and India. This is because monetary conditions in both countries are significantly tighter than for the rest of the region. 

Next most likely to be impacted are Korea and Taiwan, where Barclays notes monetary conditions are gradually being tightened. Auto sales in Southeast Asia should be better supported when compared to those in larger economies.

Finally on agricultural commodities, Barclays Capital notes while media attention has been focused on the Middle East in recent weeks the fact the Ivory Coast, the world's largest cocoa producer, is close to a civil war is also of importance.

Barclays notes since a disputed election last November more than 400 people have been killed and more than 450,000 internally displaced. The United Nations view is President Laurent Gbagbo must stand down after losing the election, but to date he has refused.

The stalemate is developing into the worst crisis for the Ivory Coast since the 2002 Civil War according to Barclays. Others are similarly negative, as a report from the International Crisis Group warns the most likely outcome in coming months is armed conflict that could provoke unilateral military intervention by neighbours. 

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