Capital Economics Sees Commodites Declining, Gold Advancing

The folks at Capital Economics aren't impressed with the commodity bull market that's still going on; they smell a resumption of the 2007-08 bubble.

Among their insights:

Commodity prices have generally extended the gains of last year, in some cases topping the highs "at the peak of the bubble" in 2008, though some precious metals have dipped.

Agricultural commodity prices are especially strong, pushed up by "supply shocks" and political developments meant to contain them. Governments fearing social unrest have restricted exports and boosted imports. "The crisis in Egypt is encouraging this behaviour, which in the near term actually makes the situation worse," but prices should drop back.

The crisis in Egypt has helped drive up oil but prices probably would have reached these levels regardless, and are expected to fall.

In effect, they're assuming that commodities are overdiscounting recovery. Their forecast for $1,600 gold by the end of this year and $2000 gold next year are based upon recovery hopes fizzling and further shocks coming.

"Prime candidates include a U.S.-China trade war, renewed turmoil in the euro zone, and a fiscal crisis in Japan," Capital Economics said. "Interest rate expectations and real yields are also likely to fall back again."

The second is based upon extrapolation, but the first and third are fairly intelligent guesses on winds that have yet to whip themselves into gales and storms. One demur: gold tends to thrive on inflation, as do commodities. Expecting gold to soar while forecasting commodities to slump does add a certain inconsistency to a creative forecast.