2010 Commodity Forecast Update and Q1 Review

by: Hyperinflation
In light of the first quarter of 2010 ending, I wish to update my 2010 economic, equity and commodity forecast (click here to see the original ) and reflect on Q1 2010, both good and bad.

Q1 2010: Review

Economic Outlook: In terms of my economic outlook I obviously did not see the Greece sovereign debt problem arising, as i was too focused on the U.S's and U.K's debt problems. Aside from that, it was rather quiet with the exception of the healthcare bill passing (which I thought had no chance of happening) and a capital controls bill being passed (which i did expect to happen but not this early) known as the HIRE bill.

Equity Outlook: I did expect a correction in the DJIA and S&P, but instead a rally has pushed it near 11,000. Although I made my fair share of errors, I did manage to make a few good calls, most notably the recent bid for Lihir Gold (LIHR) - sending the stock up nearly 30% in a day - which I first wrote about last April (click here) and most recently in my last article on March 17th (click here). One of my favorite miners, which I also previously talked (Click here) was up nearly 40% for the quarter was Red Back Mining (OTC:RBIFF)[TSE:RBI). I don't mention these so I can toot my own horn as I admit I have made my fair share of bad picks among the miners in terms of Q1 performance, notably Jaguar Mining(NYSE:JAG) and Coeur d’Alene mines(NYSE:CDE) (respectively -18.5% and -17.3% YTD
). I only mention them because of the accurate forecasts regarding these companies with regards to the qualitative aspects. Last April I called Lihir the turnaround story of the year with a very attractive valuation attached. They not only upped production guidance both near and medium term but increased reserves. With regards to Red Back I forecasted they would dramatically increase reserves, which they did twice. I also forecasted much higher production going forward last November (click here to see the full article).

Not only did Red Back increase guidance, but the magnitude was much greater than even i predicted, with peak production levels in 2013/2014 estimated to be between 800-820k.

Commodity Forecast

Precious Metals
: While I accurately called a bottom between $1,025-1,050/oz (at least thus far) I was way off with regards to my silver bottom ranging between $15.75-$16.00/oz.
Energy: Thus far, I have been spot on with Oil, with my forecast seeing oil trade between $70-$85/barrel for most of the year with a significant correction sending oil to the low-mid $60’s (more on that later) and a high of $110/barrel reached sometime in Q4.
Agriculture: Wheat continued to perform poorly, which I thought would change and still think it will. But not in Q1,

Update to my 2010 Forecast

Economic Outlook
– Given the obvious sovereign debt issues overhanging the western world, I expect to see more of this to continue. With capital controls now in place, the beginnings of a trade war are likely to develop in the near future. With the initial stages of trade wars emerging, foreigners are even less likely to buy more government paper, which we need to sell to finance our ridiculous budget deficit. The Fed will be forced to monetize the debt “directly injecting inflation”, but to what degree is unknown. Rising bond yields come along with this, so I expect bond prices to drop rather significantly.
Equity Outlook – I expect a precipitous decline in the DJIA and S&P, though it will likely be short-lived with all the inflation being created. It wouldn’t surprise me to see the DJIA drop to between 8,500-9,000. I also don’t see the DJIA appreciating much from here, topping out around 11,200 (give or take). I expect to see consolidation in the resource industries continue to pick up on y/y basis.
Commodity Outlook Update
Gold – My original forecast remains more or less intact with gold averaging $1,100-$1,150 the first half of the year, reaching a high $1,300-$1,400/oz before the summer doldrums. I forecasted another big Q4, where it will make another record high at $1,500-$1,600 before a retracement back to $1,300-1,400. I also expect support levels to increase by $150-$200 or $1,250-$1,300 for the following year. I base this on a continued increase in investment demand and a weakening dollar.
Silver – Well, I think the lows have been made for the year but am adjusting my forecast for Q2. I still expect silver to surpass $20/oz but peak at $22/oz (more or less). I am, however, leaving my Q4 target intact.
Oil – Still remains intact for the most part with my Q4 target of $110/barrel adjusted downwards to $100/barrel. I still expect to see a precipitous correction down to the mid $60’s.
Wheat – On a weakening dollar coupled with fundamentals, wheat should perform in the latter half of the year. $6.25- $6.50/bushel is well within the realm of possibilities, and is my Q4 forecast. Click here to see production-consumption numbers.

Disclosure: Long: RBIFF.PK