Bullion seen taking off in 2012

The Goldman Sachs Group Inc. is staying “overweight” on commodities as a rebound in demand revives speculation of shortages, with gold a favorite for this year as investors seek a hedge against Europe's debt crisis. Gold futures traded on the Comex in New York may climb to $1,940 an ounce in the next12 months if U.S. interest rates and inflation remain low, as expected, Jeffrey Currie, head of commodities research, said at the company's Strategy Conference 2012 in London last Monday. Analysts at Morgan Stanley also predicted that gold will hit record levels this year. Gold has dropped about 16% from an all-time high in September. Demand for gold strengthened over most of last year as Europe's debt crisis widened and the Federal Reserve pledged to keep interest rates near zero until at least mid-2013. Low interest rates increase the appeal of bullion because they generally reduce the prospect of returns on bonds. “Our view on gold is driven by our view on underlying real interest rates,” Mr. Currie said in an interview at the conference. “It is the sharp drop in price that makes it more attractive.” Gold futures for March delivery were trading at about $1,617 an ounce last week.

MORGAN PREDICTION HIGHER

Morgan Stanley named gold among its top picks in a report e-mailed last week predicting that bullion could average a record $2,200 an ounce. Mr. Currie, however, said gold prices are unlikely to move higher than $1,940 unless there is a “much weaker real rate environment” driven by inflation, which isn't embedded in Goldman's forecast. Buying by central banks will continue to support gold as emerging-markets banks continue to diversify their reserves, he said. Goldman also favors oil and copper on supply constraints, Mr. Currie said. “The core of the commodities story is a supply-side story,” he said. “I don't care how much demand China may have for a commodity. If the world can produce enough of it, I don't want to be long,” Mr. Currie said. A long position is a bet on higher prices. Goldman correctly advised investors to sell oil and copper in April, and turned more bullish the next month before prices rebounded. The Standard & Poor's GSCI Enhanced Commodity Index will return 15% in 12 months, Mr. Currie said.