See gold at $1600/oz, Brent crude at $110/bbl: UBS

Tom Price, UBS Equities Research believes gold will remain stable around USD 1600 per ounce or a little bit lower. In an interview to CNBC-TV18, he said gold had dipped below USD 1600 per ounce a just few weeks ago, but everything changed when the ECB announced its Cyprus package, which helped gold. But former drivers have come back into play and it looks like there is some downside risk coming through for gold, he said.

Commenting on crude, he says it is interesting to note that both Brent and WTI follow different fundamentals. “We think Brent would be around USD 110 per barrel, for the next quarter and about USD 95 per barrel for WTI,” he adds. Below is the verbatim transcript of his interview on CNBC-TV18 Q: Where really is gold headed? It appeared to have got a fairly decent support from that USD 1,570 per ounce levels. Is that the low it will touch or do you think it is only a temporary pullback? Overall for a quarter or the first half of 2013, how constructive are you on gold? A: A lot has happened in the last couple of weeks. So it is pretty hard to track what the drivers are. Just to summarise, year to date, gold has been under pressure because we have had very good economic data coming out of the US, the US dollar has been lifting and for most of this year, most people believed that the downside risk to Europe is fairly limited. So that’s generally good set of scenarios for industrial metals rather than gold. The other negative for gold of course is that there was no real evidence of inflation. So gold was tracking lower and it dipped below USD 1600 per ounce a just few weeks ago. Then everything turned around when the ECB announced its Cyprus package which created a lot of confusion mainly and uncertainty and that’s a great outlook for gold. So we saw a bit of a recovery. However, in the last couple of days, the ECB has come back and said the package is limited to Cyprus, there is no risk of a ripple effect across Europe. So we are basically seeing the former drivers come back into play and it looks like there is some downside risk coming through for gold. My view is that gold will settle around USD 1600 per ounce or probably a little bit lower, pretty much where it was a couple of weeks ago. Given that UBS is generally bullish on the US outlook, the risk to gold is probably either stable or downside over the next 6-12 month. Q: What’s the outlook on Brent crude? It has been around the USD 110 per barrel levels or slightly below that. Do you expect it to remain steady at these levels? A: It is pretty much the flipside of what I was saying about gold. The Brent price which is essentially the primary oil signal in Europe was tracking lower on this news on the Cyprus package. So, everyone was worried about broader economic growth. But now that the ECB has reassured everyone to say that the package is specific to Cyprus, everyone is feeling a bit more comfortable with the outlook and economic growth and of course that’s very good for a commodity like oil that feeds into that growth. I would say oil would probably remain above USD 110 per barrel. It is interesting how Brent and WTI are pretty much following different fundamentals. Over in the US, the WTI which is the primary signal for oil has been tracking lower mainly because of substantial inventories that the US is sitting on and not being offset by demand growth. Actually it got a support in the last 24-48 hours with the US Fed highlighting that it would continue to support economic growth through quantitative easing and we have seen a little bit of recovery in the WTI prices. So for that price, think of a price of around USD 95-100 per barrel and above USD 110 per barrel for Brent. Q: I would assume that strong dollar had a negative impact on crude. Would you say Brent is supported at a USD 108 per barrel or do you see it on an average dipping lower for the next quarter? A: At UBS we are thinking of numbers of USD 110 per barrel for the next quarter for Brent and about USD 95 per barrel for WTI. But the strengthening US dollar that is the currency impact on commodities, not just oil but across all commodities denominated in US currency, there is a modest bear point, because at the margin it makes those commodities a little bit more expensive to buy and that reduces the quantity demanded. So that’s a good point, it’s a modest bear point.