After performing well in recent months, BMO Capital Markets Bart Melek says "gold is likely to remain range-bound near $950/oz into 2010."
BMO Research has also upgraded its industrial commodity price outlook "due to stronger-than-expected Chinese economy and commodity imports, convincing signs that the U.S. outlook has improved, re-stocking and expectations for a weak U.S. dollar."
The massive U.S. debt and concerns about the strength of the U.S. dollar "bode well for gold long term," Melek advised.
"Notwithstanding any possible short-term correction, gold's impressive seven-year run is expected to continue well in 2011," BM Research predicted.
"Gold typically leads inflation by 12-18 months, so investors would be well advised to look toward improvement in monetary aggregates as leading indicators of inflation and higher gold prices. BMO Research expects higher trend inflation over the longer term."
Melek also suggested that central banks "could be a very positive force for gold," as central banks around the world will likely put more gold in their reserves. Even more important, China has been acquiring gold in its official reserve.
"Despite the large purchases of gold by China since 2003 and the fact that it is now the fifth-biggest holder of metal in the world, at 1.5%, the Middle Kingdom has very little of the precious metal relative to its total foreign exchange holdings when compared to other key nations," Melek said. "It needs much more gold to match other nations."
BMO also forecasts an increasingly bright outlook for other commodities.
"Investors are now increasingly convinced that the global economy has already hit bottom and is on the way up," Melek said. "Better demand prospects along with the lack of capex commitments brought on by the credit crisis and ensuing recession should drive commodity prices higher next year and beyond."
Despite improved conditions, Melek advises, "the commodity rally will likely partially unwind in the near term."
"However, despite improved sentiment and the expectations of better economic conditions, overall activity is still quite poor outside of China and markets are worried about the recovery in the U.S., albeit these concerns have waned in recent days," he added. "As such, the commodity rally may partially unwind in the near term. Any possible correction is likely to be relatively modest and fairly short-lived."
Among the commodity price change increases BMO has revised for this year are copper, up 8.4% to $2.09 per pound; lead, up 14.5% 69-cents per pound; and uranium, up 5% to $52 per pound. Changes to short-term forecasts for the third quarter-2009 include an 18.4% increase in the copper price to $2.25/lb; and a 25% increase in the lead price to 75-cents per pound.
Meanwhile, the third-quarter platinum price forecast was increased 20% to$1,200/oz. For the long-term, BMO has increased its platinum price forecast by 9.5% to $1,148/oz.
Melek predicts copper, zinc, nickel, iron ore and oil prices will be lifted "as demand improves and supply growth continues to be modest."
Nevertheless, Melek noted that many metals prices remain well below production costs. However, he added, "This implies a sizable rebound once demand starts turning materially, as it is not possible to have a price environment where a significant portion of operators have a cost structure above the selling price over the longer term."
Mineweb is a web-based international mining publication focusing on mining financial and corporate news and comment.
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