The Glittering Run For Gold Is Over!!! UBS

Gold has benefited from dollar strength and investor and speculator buying due to fears of stagflation and the impact of the credit crunch. We forecast that gold will fall over the next two years to levels better supported by jewellery demand.

We forecast that gold will average $851/oz in 2008, higher than our previous forecast due to the better than expected Q1-08 outcome. Our forecast of $750/oz for 2009 is unchanged.

The consensus forecast is for gold to average $862.30/oz according to the LBMA forecast 2008 publication.

Performance
Speculative and investment buying resulted in gold trading sharply higher in January and February, breaking the previous all-time high of $850/oz in the first real trading day of 2008 and then going on to set records, culminating in a new all-time high of $1030/oz.

But gold could not hold onto these lofty levels and slipped back to trade down to $874/oz. After a bounce to just above $950/oz in

April, the metal has succumbed to more widespread profit taking and is trading around $880/oz at the time of writing.

In the absence of the unusually strong safe-haven buying of gold we believe gold would be trading near $700/oz and the metal is vulnerable to a further correction.

Demand environment
The first three months of 2008 saw very poor jewellery demand as gold moved sharply higher with our sales desks report jewellery demand of 5-15% of the levels we consider strong. The sell-off in gold in late March has seen some recovery but demand remains much lighter than normal for the time of the year and this leaves the metal vulnerable to further profit taking.

ETF investors bought only 2.0 million ounces of gold in the first quarter of 2008, disappointing considering the very strong performance of gold. Net redemptions have occurred since then and as at 24 April, total ETF positions stood only 600koz higher than on December 31st with 1.6moz of redemptions between 22 and 24 April.

US futures market gold investors held large spec long positions through the first ten weeks of 2008 before liquidating some of their holdings in late March and April.

Supply environment
GFMS report that gold production fell by 0.4% in 2007 to 2,476t as mining companies struggle to maintain existing production and are failing to find new mines to expand. We expect gold supply will remain under pressure in 2008, not least because of the power and other production problems faced by the South African mining industry, discussed in more detail in the introduction to the precious metals section.

Our refinery contacts and physical sales desks in Switzerland report a surge in the sale of scrap gold coming back to the market with the gold price at such elevated levels. This is reducing the jewellery industry¡¯s net demand for gold.

Gold mining de-hedging continued at a rapid pace in 2007 according to GFMS, which estimates the net hedgebook declined by a record 446t. The remnant of the global hedgebook is now small to GFMS and increasingly concentrated in a only a few mining companies. We expect the rate of producer de-hedging to slow in 2008, but we have said that every year for the past few years and have been surprised by aggressive buy-backs each year.

Central banks remain net sellers of gold, disposing of a total of 481t in 2007, more than the 370t sold in 2006. The vast majority of the sales in both years came from the signatories of the Central Bank Gold Agreement (CBGA) with Spain and Switzerland the most interesting sellers. Spanish sales increased sharply in 2007 while Switzerland, a large seller under the first CBGA, restarted sales due to the high gold price, which had increased gold¡¯s proportion of its total reserves.

Some small central bank buying was noted in 2007 including Qatar and Russia, although most large central banks that have small gold holdings remained sidelined.

News-flow to watch for
The quarterly results of the gold miners with hedgebooks ¨C including AngloGoldAshanti, Barrick and Newcrest ¨C for signs of further de-hedging.

Weekly COTR data from the CFTC and daily open interest figures from
TOCOM are useful measures of visible speculative positioning.

Quarterly supply and demand reports from the World Gold Council.

Captilizaing on Commodities Bubble-Michael Shluman

There's a black cloud looming over the commodities market. However, behind that cloud, those of us who are situated on the short side (that is, buying put options and profiting when stocks are going down) can expect to find a rainbow with a pot of gold at the end.

I know, I know: Wheat is up 600% a bushel. Oil touched an inflation-adjusted, all-time high and seems as though it's setting up permanent residence above $100 a barrel. Gold prices were a straight tear up (although a recovery in the U.S. dollar has helped capped them).

I can hear you now: "There's no way to play the short side of the commodities sector, Shulman."

Longer term, there's every reason to believe that commodity prices will be high and perhaps go even higher. You might have heard a lot about growing infrastructure and demand in areas like "Chindia" (i.e., China and India) and other developing nations.

With this boom will come increased need for food, building materials and energy sources. As emerging countries become more industrial, it is only natural that more jobs will be generated, leading to a higher standard of living and even more commodity consumption.

That's the big-picture outlook. But with a slowing U.S. economy and its carryover into the global community, not to mention the fact that the big-money players (i.e., institutions, hedge funds) are piling into commodities and inflating the prices with their speculative buying, what does it mean for us in the short term and, more specifically, on the short side?

Even as the economy seems to be taking a rest, commodities are likely going to pull back before they keep going up, up and away. This bubble is building.

In some commodities, there's a classic parabolic bubble, which is a short-side investor's dream.

Perhaps gold can run to $1,600, as "Mad" man Jim Cramer thinks -- but will wheat remain near their high of $25?

Will a fertilizer and feed producer -- which is on my "short" list of companies that are going to get hit when the commodities bubble starts deflating -- manage to stay in the stratosphere? Will platinum keep shooting skyward?

Smart short-side investors need to identify the commodities that are driven by economic reality and look for places to establish short-side plays for the commodities or companies on a free ride with the run-up in prices. There are plenty, but there are also some rules to follow:

Rule 1: Don't get ahead of the bubble bursting. It's better to miss the beginning than get run over by being too early.

Rule 2: Focus on those commodities most tied to economic reality.

Rule 3: Avoid commodities that are potentially driven by geopolitical events.

Rule 4: See rule No. 1.

So, how do you profit while commodities are poised for a pullback? There are two main areas I'm investigating right now.

The first is agricultural commodities. There's no way that wheat will stay at $25 (up from $4 last year), or that a company we're riding on will remain around $160 (up from $60 just one year ago!).

There are several exchange-traded funds (ETFs) and several overbought companies in this sector, so I am looking at them carefully right now. I also have a close eye on precious metals other than gold -- namely, platinum and silver. This segment can also be played by a mixture of ETFs and individual companies.

But for every opportunity, there is a sinkhole, and I can tell you what I will not be shorting.

Gold. Avoid playing the short side of gold at all costs. It is tied to the U.S. dollar and geopolitical issues -- and just possibly to the people who built bomb shelters in the '60s and their offspring who created hideaways in preparation for Y2K.

Oil. The fundamentals show that oil prices will rise because they are also tied to the dollar and geopolitical events. Stay far, far away.

In general, I'm keeping anything that is tied to the U.S. dollar -- or other factors beyond the segment that can change on a dime and decimate a play -- far from my "short" list.

But remember, you can play the short-side of individual stocks, sectors and, soon, commodities -- and you should.

Where are Aluminium Prices Heading?

Courtsey:According to Karen Norton from Reuters.

Analysts feel Supply problems will support the aluminium market in the near term, but high inventories will act as a brake on any attempt to move sharply higher. The LME three-months price reached a six-month high of $2,738 a tonne last week, driven up by severe winter weather in China and its worst-ever power cuts. Traders last estimated that around 1.5 million tonnes of annual aluminium smelting capacity had been shut. Producers in southern Africa cut their power usage to help ease a power shortage there. Adams of Basemetals.com feels prices could get up to $2900 in next month but can't be sustained due to high stock levels. Another consultant Angus MacMillan said the supply woes would make some difference to the market balance this year, but also thought the worsening economic outlook would counter that to some extent by having a negative impact on demand.Most analysts had been predicting a modest supply surplus this year.

(Thus the outlook could be threatened if analysts have undermined the extent of the current problems.) Stephen Briggs, economist at SG Corporate and Investment Banking thought aluminium had the least downside potential of all the LME-traded metals as recession loomed, due in part to the fact that it had made the least gains in recent years.

Some recent developments in production, stocks and prices that may influence the direction of the aluminium market in 2008 has been listed in the report.

PRODUCTION:

Jan. 31 - Rio Tinto Ltd/Plc said it reached a new power supply pact with the local utilities authority for its Kitimat aluminium smelter in British Columbia, Canada, allowing it to proceed with a 125,000 tpy expansion to 400,000 tpy.

Jan. 31 - BHP Billiton said it would cut power usage at its three aluminium smelters in southern Africa by 10 percent to help ease a power shortage. The reduction would gradually take place at the Hillside and Bayside smelters in South Africa and the Mozal operation in Mozambique and be completed in around five days.

Jan. 30 - China's worst-ever power shortage and severe winter: As of Feb. 5, traders estimated up to 1.5 million tonnes of aluminium smelting capacity was shut in order to conserve power to residences.

Jan. 30 - Rio Tinto said its planned Coega aluminium smelter in South Africa is progressing despite the country's power crisis. The project, due to produce 720,000 tpy of aluminium, will go the Rio Tinto board around mid-2008 for final approval.

Jan. 29 - Netherlands-based aluminium company Vimetco said it would focus on adding bauxite mine assets to its portfolio in a bid to become a fully integrated producer of the metal. On Feb. 5, the company said the Ministry of Mines in Guinea granted it a reconnaissance permit for the prospecting of bauxite in the Kindia Prefecture in Guinea. Vimetco also said its Tulcea alumina refinery in Romania, now closed for rehabilitation work, would probably restart in the second half of next year, subject to overall market conditions. The refinery has the capacity to produce around half a million tpy of alumina.

Jan. 25 - China's Bosai Minerals Group Co said it would invest $694 million to build a 1 million tpy alumina refinery in Guyana. Construction would start in the first half of 2009 and begin production two years later. Bosai expects its alumina production capacity in China to jump to 500,000 tpy from last year's 200,000 after a 300,000 tpy plant near Chongqing launches production by the end of 2008. Bosai expects to increase its aluminium smelting capacity to 200,000 tonnes in 2008 from last year's 130,000 tonnes.

Jan. 25 - China produced 12,283,600 tonnes of primary aluminium in 2007, up 33.8 percent from a year earlier, the National Bureau of Statistics said. Production of alumina rose by 47.7 percent over the same period to total 19,507,900 tonnes.

Jan. 25 - Power shortages could slow aluminium output growth this year to 22 percent to an estimated 15.0-15.5 million tonnes, from 12.3 million tonnes in 2007, out of a capacity of 16 million, industry officials said.

Jan. 21 - Daily average primary aluminium output in December rose to 69,700 tonnes compared with an upwardly revised 69,300 in November, provisional figures from the International Aluminium Institute (IAI) showed. In December 2006, daily average output was 66,400 tonnes.

Jan. 18 - Ormet Corp. said its Hannibal aluminium smelter in Ohio was completely up and running. At full capacity the plant produces 260,000 tpy of aluminium. The company restarted the last of its smelter's six potlines on Nov. 28.

Jan. 17 - An official of South African power utility Eskom said Alcan's Coega aluminium smelter plant could be delayed as it reviews its power supply for the project.

Jan. 11 - The annual rate of primary U.S. aluminium production surged 17.7 percent to 2,712,197 tonnes in December from 2,303,998 tonnes in December 2006, the Aluminum Association said. December's output rate was the highest since April 2003. For the year, 2007 production increased 12.2 percent to 2,559,673 tonnes from 2,280,916 tonnes a year earlier.

PRICES

Having ended 2007 just above $2,400 a tonne, aluminium prices trended higher in early January, albeit within their well-established trading range.

Worries about a recession in the United States took the whole LME complex lower later in the month, with aluminium trading down to $2,377 on Jan. 22.

But prices recovered and then shot higher at the end of last month as it emerged that Chinese smelters had been hit by power shortages and severe weather conditions. This came on top of power supply woes in South Africa.

On Feb. 1, the three-months price reached a six-month high of $2,738 a tonne and, despite easing since then, further gains have been mooted.

In January, the twice-yearly Reuters base metals price poll of 42 analysts put the 2008 median average for the LME cash aluminium price at $2,506 a tonne in 2008 and $2,540 in 2009. In 2007 the price averaged over $2,665 a tonne.

STOCKS

Total exchange stocks were 1,065,183 tonnes at the end of January, little changed from 1,046,002 tonnes. Of that total, some 956,475 tonnes were held in LME warehouses, compared with 929,450 tonnes a month earlier. Total visible stocks, including latest International Aluminium Institute (IAI) unwrought stocks (0#STOCKS-IAI) were 2,618,183 tonnes, equating to about 26 days of consumption.

Estimated aluminium stocks at the Japanese ports of Yokohama, Nagoya and Osaka totalled 198,600 tonnes in December, up 12 percent from a record low of 178,100 tonnes a month earlier, an official at Marubeni Corp said. Inventories may have risen due to the arrival during the month of delayed shipments from Venezuela, the official said. Inventories were about 15 percent below the year-earlier level of 233,900 tonnes.