Fed decision boosts some commodities

THE DECISION by the US Federal Reserve last week to buy $40 billion (R328bn) worth of mortgage-backed debt a month, until the outlook for jobs improves, has boosted the fortunes of some commodity producers. Walter De Wet, the head of commodity research at Standard Bank, said yesterday: “We have little doubt that commodities will rally – in fact they have.”

Gold has been among the high profile gainers from the Fed’s decision, with the price climbing from $1 730 an ounce on Wednesday ahead of the announcement, to fix at $1 770 yesterday afternoon.

If the Fed continues its programme to mid-2015 – the date when it could start raising interest rates – its bond purchases would be worth a cumulative $1.3 trillion.

De Wet said this would push his estimate of fair value for the metal from $1 660 to around $1 900. “So we see substantial upside for the metal even from current levels.”

He based his prediction on developments over the six months after the announcement of the second round of quantitative easing in November 2010. Gold, silver, Brent crude oil and aluminium would benefit most, followed by platinum and palladium.

But he noted that industrial demand for platinum and palladium was weak and the rally could fade “once supply issues find some resolution”.

Base metals are not likely to gain because they react less to Fed policy decisions, according to De Wet.

And consumption of thermal coal for China’s electricity needs is falling as the share of hydroelectricity increases. “As a result we doubt that demand for thermal coal from China is going to pick up soon,” he said. – Ethel Hazelhurst continue, the more can be subtracted from GDP. But the loss to the economy doesn’t stop there.

“The Treasury releases its update on the budget in the medium term budget policy statement next month. And markets are anticipating some deterioration in a handful of key financial stability ratios.”

He said public debt and other indicators of government’s financial performance were measured against GDP and any deterioration would be magnified by weaker GDP, “which Finance Minister [Pravin] Gordhan has already cautioned is likely to be revised lower for this year”.