Gold Top Pick at Morgan Stanley as Europe Debt Spurs Demand

Gold will lead a rally in commodities in 2012 as Europe’s sovereign-debt crisis continues to roil financial markets, spurring demand for the metal as a haven asset, according to Morgan Stanley.

“There’s a very strong chance that gold will re-challenge successfully the all-time high,” said Peter Richardson, chief metals economist at Morgan Stanley Australia Ltd., who has studied the metals markets for more than two decades. Bullion may climb to a record $2,200 an ounce in the first half, he said in an interview. He also backed copper.

Gold is rallying for an 11th year, gaining 24 percent, as investors seek to protect their wealth from declining equities, depreciating currencies and the threat of inflation. While billionaire John Paulson cut his stake in the SPDR Gold Trust in the third quarter, he is still the biggest holder. Central banks will continue to be net purchasers, according to the producer- funded World Gold Council.

The euro-zone crisis shows no sign of being “close to a resolution” and the contagion risk spreading across Europe is just the beginning, Richardson said in Singapore yesterday. “A significant withdrawal of credit, write-downs on balance sheets, these are not good developments for financial markets generally and it’s very hard to see how this can end well.”

Gold for immediate delivery, which reached a record $1,921.15 on Sept. 6, traded at $1,764.77 at 4:08 p.m. in Singapore today. Purchases by central banks may reach 450 tons this year, the council said today.

Goldman Sachs

Goldman Sachs Group Inc. expects raw-material prices to advance in the next year. The S&P GSCI Enhanced Commodity Index will climb 15 percent led by industrial metals, it predicts.

“We maintain our view that global growth will provide enough support to demand to drive key commodity prices higher,” even with the European crisis, said Jeffrey Currie, head of commodities research, Nov. 14. Gold will be at $1,930 an ounce and copper at $9,500 a metric ton in 12 months, the bank said.

Consumption across Asia has been “one of the powerful drivers” of investment demand for gold, said Richardson. China will overtake India in the next couple of years as the largest bullion consumer, he said.

Investment demand in China expanded 24 percent in the third quarter from a year ago to about 60 tons, the council said today. That was the second-largest after India, which shrank 18 percent to 78 tons in the same period, it said.

Worst Month

Gold in September had its worst month since October 2008 as the dollar rose and some investors cut their holdings to raise cash amid falling equities. That month saw gold prices tumble 11 percent as the dollar rallied 6 percent against a six-currency basket and the MSCI All-Country World Index slid 9.7 percent.

“This is a restoration of a more normal relationship with the U.S. dollar,” said Richardson. Even in a flight to the U.S. dollar as a haven, there is a “reservoir of potential demand that could come in very quickly” if things start to really deteriorate, he said.

Holdings of the metal in exchange-traded products increased 3.4 percent since Sept. 30 to 2,323.5 tons and are within 7 tons of the record 2,330 tons on Aug. 18, Bloomberg data show.

While Paulson cut his stake in the SPDR Trust by 36 percent in the three months to Sept. 30, investors George Soros, Paul Touradji and Paul Tudor Jones bought shares, Securities and Exchange Commission filings show.

China Copper

Demand for copper in China, which represented 39 percent of world usage last year, supports prices at $6,700 a ton to $7,800 a ton as the nation rebuilds its stockpiles, said Richardson. Declining inventories in China and on the London Metal Exchange are an indicator of Chinese buying, he said.

Three-month copper has dropped 25 percent from a record $10,190 on Feb. 15 in London and stood at $7,650 today.

Chinese copper usage will expand 8 percent in 2012 to 8.58 million tons, compared with 5.2 percent growth this year, according to Morgan Stanley. (MS)

The amount of copper stored at so-called bonded warehouses in China has dropped to 350,000 tons to 400,000 tons from a peak of about 750,000 tons in the first half, Richardson said. LME- monitored stockpiles in Asia have slumped 57 percent from June 30 to the lowest since January, according to LME data. Most of the decline was in South Korea, which stores more than 64 percent of LME stockpiles in Asia.

To contact the reporters for this story: Glenys Sim in Singapore at gsim4@bloomberg.net; Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net

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