Up until last week, Deutsche Bank’s commodities team, led by Daniel Brebner, had the highest price forecasts for gold of anyone on Wall Street.
Despite the steady stream of negative sentiment toward gold from other investment shops in recent months – including a wave of price target downgrades and declarations of “the end of the gold era” – the Deutsche Bank strategists maintained their targets for an average gold price of $1875 an ounce in the third quarter of 2013 and an average price of $2000 in the fourth quarter.
However, in Deutsche Bank’s quarterly commodities report published last Tuesday – right before the start of a massive sell-off in the metals complex that is still underway today – Brebner and his team slashed their Q3 target 13.3 per cent (to $1625) and their Q4 target 15 per cent (to $1700).
They also introduced a new trade recommendation: long palladium, short gold.
Below is their explanation of the trade:
Although there are short term risks to the palladium outlook given the degree of speculative length, over the coming years we look for palladium to out-perform gold. This not only reflects rising markets deficits in palladium, but the implications of a new long term uptrend in the U.S. dollar poses for the gold price.
Tightening physical fundamentals in the palladium market are being driven by both supply and demand side factors. On the supply side, we see the risk of additional supply disappointment as an ongoing feature in this market. On the demand side, we expect slightly lower diesel penetration in Europe and by inference more palladium gasoline catalysts will help to boost the demand side of the palladium market balance.
Finally, the upturn in U.S. economic activity is leading our U.S. Auto team to upgrade their forecasts for U.S. car sales this year and next. Moreover, Chinese auto sales continue to grow strongly and government efforts to reduce emission levels would also tend to support palladium demand over the medium term.
Today, in a follow-up note, the team introduces another, similar trade: long aluminium, short gold.
In this morning’s note, titled “Metals Relative Value: Long Aluminium vs Short Gold,” they write:
On a valuation basis gold still trades rich relatively to the industrial metals complex … Moreover in an environment of a rising US dollar and the possibility of an upturn in Chinese economic activity before the end of this year, it might be safe to assume that the undervaluation of industrial metals relative to gold may start to normalise.
Indeed the aggressive short positions held by the speculative community in base metals would suggest that in the event of a short term improvement in real economy data in China, these positions may be closed. Moreover we would view these base vs gold RV trades as potentially profitable over a multi year horizon since they tend to perform well in strong dollar environment, Figure 2.
It looks the gold sell-off over the past week or so has made believers of most Wall Street strategists for now.