Apr 17, 2012, 08.28 AM IST
David Lennox of Fat Prophets sees more downside for Nymex and Brent going forward as the three biggest gas guzzlers – US, Europe and China are facing heady macro pressures.
Crude has finally gotten off that USD 125 per barrel mark for Brent and come closer to USD 120 per barrel. However, if the situation in the Middle East, especially over Iran’s nuclear program renews fears of supply risks, then crude might head higher.
David Lennox of Fat Prophets sees more downside for Nymex and Brent going forward as the three biggest gas guzzlers US, Europe and China are facing heady macro pressures. “When you take the three of them together and you look at their petrol usage we do think that that’s going to put some soft pressure on demand going forward.”
He remains bullish on the gold story for the longer-term but in the near-term he sees the yellow metal coming under some pressure. According to Lennox, gold will for the time being stay dependant on currency movements especially the currency movements between the dollar and the euro as the news on either side of the Atlantic is either good or bad. He is also looking at sovereign buying leaving an impact on gold.
“We think that that’s going to be the key driver going forward and if sovereign governments don’t step in and buy rapidly then gold may probably remain subdued for some time,” adds Lennox.
Below is an edited transcript. Watch the accompanying video for more.
Q: A lot of currency and other analysts had been pointing out that at current levels of the euro, even at 1.33, crude really shouldn’t have been at USD 125 per barrel and that should have been closer to maybe USD 115 or USD 110 per barrel which is the element of risk premium that crude has assumed over the past six months or so. Now that there seems to be some kind of a political risk off especially in Iran, do you think there is more downsides for crude?
A: We are certainly of the opinion that there is potentially more downside for the Nymex and Brent. We do think when you look at the three largest consuming regions of the globe that’s the US, China and Europe. China we know is slowing, Europe is obviously now in some form of recession or certainly not growing and the US economic growth is somewhat shaky and it’s only in its very early days. When you take the three of them together and you look at their petrol usage we do think that that’s going to put some soft pressure on demand going forward.
Q: What exactly are you making of copper which was down 2.5% on Friday? We had that Q1 GDP number which didn’t go down too well from China. How exactly do you expect copper to move?
A: The market I think was caught by surprise with the Chinese figure coming in at 8.1% growth per annum. Consensus was probably somewhere about 8.4% and when the market does get caught by a surprise figure they do tend to react quite rapidly and in this case in the negative. We did see copper fall quite severely along with most of the other base metal prices as well.
Going forward, the markets are going to probably be somewhat subdued in terms of price rises until they start to see some form of bottoming in the Chinese economy, i.e. we have to start seeing those numbers not so much now falling but starting to say around 8%. We think when we see those we will start to see a basing in the prices of base metals and prices probably will then start to move higher.
Q: How much downsides would you give copper?
A: We probably can’t see copper going terribly much lower than where it is unless we do see the Chinese economy slowing a lot more than the 8% where it’s currently growing at. If that happens then, yes, we can probably see another 10-15% coming out of the price of copper, but we are not of the view that we will see China slowing to that extent.
We do think they have got the policy tools at their sleeves, credit rating and credit reserve softening. Also their interest rates could come off if they wish too. That would re-stimulate economy probably fairly quickly. So 10% or 15% in copper is probably the low provided China’s growth stays somewhere around this 8%.
Q: One would have thought that gold should see a little bit of a rally considering that the old worries over Europe are resuming. The central banks have become active. They are buying bonds, so a little bit of liquidity will be in the system. QE3 is once again making its presence on the radar, at least in terms of market expectation. One would have thought all of this should have fueled gold but we don’t see it quite even in the early grip of a bull run?
A: We certainly over the longer-term remain quite comfortable with the gold story. We do however think that in the short-term the safe haven factors that have sort of been hung on gold now for some many months have probably gone fairly thin in terms of traders’ views on pricing. We do think that gold for the time being probably has to rely more on currency movements and obviously the currency movements between the dollar and the euro as the news on either side of the Atlantic is either good or bad, and also sovereign buying.
Going forward, where countries like China, as their economy becomes a more important part of the global economy, they will certainly have to top out their gold reserves. So we think that that’s going to be the key driver going forward and if sovereign governments don’t step in and buy rapidly, we think gold will probably remain fairly subdued going forward for sometime.
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