Gold isn’t all that glitters

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

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’ gains have outstripped both oil and gold for 2007).

“It’s being driven by surging interest around the world in biofuel,” Mohr explains.

She points out that the three major crops used for biofuel — corn and sugarcane for ethanol and palm oil for biodiesel — all use potash as fertilizer.

“That’s why it’s at a record high and will probably go even higher in the 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. That’s led China — which is both an importer and exporter — to cut exports to Japan.

To make up for its shortfall, 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.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 gold bugs are eyeing, 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, the U.S. dollar will continue to weaken, driving hedge funds into hard assets like gold to hedge against losses in the greenback, Mohr says.

Secondly, because gold is trading in lockstep with crude oil, 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.

What pullback there is, she says, will come from a boost in OPEC production, combined with a slowing of demand in G-7 countries.

The last major factor bolstering gold prices is continued geopolitical risk. Dodgy investment climates in places like Venezuela and the Middle East are a boon to precious metal prices, Mohr says.

“Issues over Iran’s uranium enrichment program and confrontation between Turkey and the Kurds threaten 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 reported that nine of 50 economists who participated 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 two-per-cent range.”

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