Platinum may jump 60%, predict analysts

[] — Platinum was tipped on Wednesday by two leading investment bank analysts to be among the strongest performing commodities in the coming months, while gold and crude oil were seen remaining firm.

Limited supplies and the potential for increasing demand from the manufacturing sector are seen supporting platinum prices, while the analysts warned of the potential for a significant setback for gold if real interest rates rise, although not seeing it as an imminent threat.

Jeffrey Currie, global head of commodities research at Goldman Sachs, said platinum prices could rise nearly 60 percent to $2 700 an ounce by the end of next year from $1 700 currently.

“All of it (platinum) sits in South Africa and Zimbabwe. South Africa’s production is in decline. You’ve got great reserves in Zimbabwe, but as long as (President Robert) Mugabe is there, no capital is going to flow,” Currie told the World Commodities Week 2010 conference.

Platinum has many industrial uses including for catalytic converters and dentistry equipment, while there is also strong demand from jewellery manufacturers.

“We are waiting for a continued improvement in the manufacturing sector,” Currie said.

Platinum prices have risen about 16 percent this year, but so far gold has outperformed with a gain of 23 percent. Palladium, another platinum group metal, has registered an even steeper 44 percent advance.

Gold rose to a record high on Wednesday, while palladium hit its highest level in nine years.

Francisco Blanch, head of global commodity research for Bank of America Merrill Lynch, also named platinum as his top pick on a risk-adjusted basis.

“I think it has got very little downside. If gold prices move up in big steps, platinum will benefit; if industrial production recovers, platinum will benefit; and your downside is probably $90 (the drop per ounce),” he said.

Gold’s downside risk

The analysts expected gold to remain strong although saying the precious metal could suffer a steep setback if real interest rates start to climb.

“If we get back to a real interest rate of around 3.5 percent, which is the long-term line, the gold price is (likely to be) around $700. This thing is going to fall off a cliff,” Goldman Sachs analyst Currie said.

“However, we would argue (the rise in real interest rates) is probably another 18 to 24 months out,” he added.

Blanch of Merrill Lynch said the investment bank had set a target for gold of $1,500 an ounce, up about 12 percent from the current price of around $1,342.

He said a key supportive factor was the need for central banks in emerging markets to buy.

“Emerging market central banks are dramatically short. We estimate the risk-neutral level for gold allocation is about 10 to 15 percent for central banks in emerging markets,” while the current allocation is about 1.5 percent, he said.

Blanch agreed that any rise in real interest rates would provide a strong sell signal.

“Gold is very much linked to real interest rates so if the opportunity cost of holding gold increases … it will fall very quickly,” he said.

Currie also saw the risk of a sovereign default as helping to keep gold prices firm.

“The key is you want to be long gold until that sovereign default risk goes away,” he said.

Blanch and Currie also expected crude oil prices to rise over the next few months.

“We believe we will touch $100 (a barrel) sometime next year”, Blanch said, adding, however, that “if we get to $100, with the current problems in OECD economies we will see a pullback.”

Blanch said crude oil might average $85 next year.

Currie said he expected crude oil prices to move up into a new range of $85 to $95 over the next 12 to 18 months.

Crude oil prices hit a five-month high of $83.33 a barrel on Wednesday after spending most of the past few months between $70 and $80.