JPMorgan Turns Bullish On Commodities, Lukewarm On Gold – by Neils Christensen (Kitco News – July 2, 2013)

(Kitco News) – For the first time in almost two years commodity analysts at JPMorgan have turned bullish on commodities and are now overweight the entire complex.

“In a number of commodities, prices have fallen far enough for long enough to force involuntary cuts in production and to spur fresh demand,” the bank said in the report released Sunday. “Risk is now skewed toward demand growth surprise and production disappointment.”

Although the firm’s analysts do admit that downside risks remain high, their recommendation in the report has been very clear.

“Our analysis concludes that it is in the best interests of most commodity index investors to buy immediately,” they said. “We would rather be premature in our pretend portfolio than you be late in your real portfolio.”

The firm is slightly more bullish on energy commodities particularly oil than it is in precious and base metals – the analysts said in the report that their “overweight” view is based on the energy sector, “that dominates most indices.”

The analysts laid out ten points to highlight their shift in sentiment:

  • Seasonal factors will boost oil prices
  • Fresh demand for storable commodities like gold and copper
  • Involuntary production cuts due to the recent drop in prices
  • Rising inflation in production costs, which they are expecting will filter through the economy
  • Tight spare capacity and rising supply risks
  • Lagging benefits from interest rate cuts and monetary stimulus measures
  • A shift in U.S. export policies
  • A shift in Chinese energy policies
  • Adecoupling of the U.S. dollar with commodity prices
  • A bottoming of global growth and inflation rates

Although the U.S. dollar index has recently made significant gains, which many traders have said is the reason for lower gold prices, the analysts at JPMorgan said that the U.S. dollar strength is relative.

The analysts explained that the dollar index does not include the Chinese yuan, which appreciated at an annualized rate of 7% in the second half of the year.

“Though the rate of appreciation has slowed following the June summit of Presidents Xi and Obama, the move has provided the world’s largest metals consumer with greater purchasing power to restock in commodities where it is import dependent, such as copper,” they said.

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