Gold To Hit $2,000/Oz By Third Quarter, Then Retreat – Barclays

Precious metals, paced by gold breaking $2,000 an ounce by the third quarter, should lead the commodity sector in 2012 with 20% gains by the end of the second quarter and up 21% for the entire year, Barclays Capital said Thursday.

In a research note, Barclays said after rising to $2,000 by the third quarter, gold likely will back off slightly.

Gold will still end higher year-over-year, Barclays said. Silver should have a similar trajectory, up in the first and second quarter, peaking in the third quarter. However, they see silver ending 2012 below levels recording in the fourth quarter of 2011. “Gold’s larger share in the S&PGSCI weighting means the double-digit growth expected for this year is a larger driver of overall returns,” they said.

Commodities have rallied stoutly in January, but they might be vulnerable to a setback near-term. As a whole, however, the main commodity indexes should rise in 2012 about 10% as China is able bring its economy down to a soft landing, the U.S. will continue to grow and worries over European sovereign debt will ease, they said.

In addition to precious metals, base metals should be the next-strongest price leader of the group. Base metals are forecast to show returns of 13.5% in the first half of 2012 and 14.4% in all of 2012. All base metals but nickel should rise, with several peaking in the third quarter before pulling back by the end of the year.

Energy prices are forecast to rise, with gains of 2.9% in the first half of the year, rising to 8.8% by the year’s end.

Agriculture markets, outside of cocoa, could see weakness in 2012, particularly in the second half of 2012. The agriculture markets might be the only sector to see negative returns in 2012, they said.

Commodity investment flows should also rebound this year, Barclays said. In 2011, investment flows were the weakest since 2002, with just $15 billion investment, down from $67 billion in 2010. In December alone, there were $7.7 billion in net withdrawals from commodity funds. The year ended with $399 billion total assets under management, which was up just $19 billion over the year prior.

“We believe commodity investment flows will rebound in 2012, but will not go back to the very high levels reached in 2009-10. An easing in the unusual factors which capped flows last year, ie, the European debt situation, along with what we expect to be an economic stabilization, should provide upside potential to commodity investments,” they said.

Barclays also expect correlations between commodities and other asset classes to ease this year. “Last year saw a pick-up in the correlations on the back of macro concerns and heightened volatility leading to a number of sell-off episodes across different markets,” they said.

“Negative roll yields” – or the drag on returns when investors have to sell a less-expensive nearby commodity contract and buy a more expensive deferred commodity contract to retain a position – should ease, they said.

This happens when commodity markets are in contango, or carry, meaning prices for the commodity rise as time goes on to reflect costs for insurance and storage. Backwardation happens when the nearby prices are more expensive than longer-dated priced. When that happens it signals strong immediate demand and usually tight current supplies.

“Negative roll yields are likely to become less of a drag on overall returns this year as tightness returns to several commodity markets, as supply struggles to keep up with demand. As a result, this should make commodities more attractive for first-time investors. The easing in negative roll yields is in line with a trend already observed through 2011. For instance, the negative roll yield on the S&PGSCI shrank from -11.8% in 2010, to -3.3% in 2011 and -0.2% YTD in 2012,” they said.