All that glitters is not gold

While investors buzz about gold breaking the US$1,000 an oz. plateau in the coming year, Patricia Mohr, vice-president of industry and commodity research at Scotia Capital, says the hot mineral commodities for next year will be those with less luster.

Mohr says potash and metallurgical coal have the kind of supply and demand fundamentals able to morph them into full-fledged desirables in the coming year.

Potash, which is mainly used in fertilizer production, is enjoying a strong run in-step with the boom in agricultural commodity prices (agricultural commodities have out-gained both oil and gold for 2007).

Its being driven by surging interest around the world in bio-fuel, Mohr explains.

She points out that the three major crops used for bio fuel corn and sugar cane for ethanol and palm oil for bio diesel — all use potash as fertilizer.

Thats why its at a record high and will probably go even higher in first half of next year, she says.

Metallurgical coal is also enjoying a surge in demand, especially that which is coming out of the ground in Western Canada.

Contractual prices are moving up between Western Canadian producers and Japan thanks to continued strong steel production in China.

As steel factories burn through the Chinese nights, market conditions for hard coking coal turn ever tighter. Its lead China which is both an importer and an exporter to cut exports to Japan.

To make up for its short-fall Japan has turned to the global markets causing current contractual prices to rise higher than prices on future contracts.

Mohr sees companies such as Fording Canadian Coal Trust (FDG.UN-T, FDG-N) and Teck Cominco (TCK.A, TCK.B-T, TCK-N) as being in a prime position to take advantage of the situation.

As for mineral commodities with a bit more bling, Mohr says she has a constructive position on gold and forecasts an average price of US$850 per oz. for the coming year.

While not in the US$1,000 range goldbugs have ears for, Mohr points out her figure is still considerably north of the US$690 per oz. the yellow metal averaged over 2007.

The drivers behind continued momentum for gold are threefold, she says.

First off, she says the U.S. dollar will continue to weaken driving hedge funds into hard assets like gold to hedge against losses in the greenback.

Secondly, golds trading in lock-step with crude oil means that strong oil prices in the coming year should translate into continued strength for gold prices.

While Mohr says crude is likely trading at the high side of its price curve, she believes it will stay exceptionally high at least through the first half of next year and wont retreat much thereafter.

What pull-back there is, she says, will come from a boost in OPEC production combined with a slowing of demand of in G7 countries.

The last major factor bolstering gold prices is continued geo-political risk. Dodgey investment climates in places like Venezuela and the Middle East are a boon to precious metal prices she says.

Issues over Irans uranium enrichment program and confrontation between Turkey and the Kurds threatens to destabilize the Middle East, she says. It points to stronger gold and silver prices as they serve as a safe haven.

As for the prospect of a coming recession a survey by the National Association for Business Economics said nine of 50 economists said there was at least a 50% chance of a recession over the next 12 months, up from just five who thought the same only two months ago — Mohr believes that a slowdown is the more likely scenario.

I think the U.S. economy will skate through with a slowdown, she says, growth will likely be fairly slow in the 2% range.

If a recession does arrive, however, Mohr thinks its net effect would be beneficial to gold prices.