UBS says monetary easing a "game changer" for commodities

LONDON Tue Oct 19, 2010 4:25am EDT

LONDON (Reuters) - Swiss Bank UBS said on Tuesday a fresh round of U.S. monetary easing could be a "game changer" for commodities and identified palladium, iron ore, thermal coal, gold, copper and zinc as its top commodity picks.

The bank said recent comments from the U.S. Federal Reserve made it a "racing certainty" that more quantitative easing would be introduced at the central bank's next meeting in November.

A second round of QE "means that strong international capital flows will reinforce already powerful domestic credit creation in emerging markets," the bank said in a report.

"That should flow through to robust, commodity-intensive growth in EM, while the developed world struggles in the face of higher commodity prices," it added. "We believe that QE2 will prolong the bull market in commodities."

Auto-catalyst metal palladium, thermal coal and iron ore headed the bank's list of top picks. Palladium is expected to rise as constrained supply from South Africa and Russia, in conjunction with rising demand, tighten the market.

The white metal is one of the best performers of the commodities complex so far this year, with prices currently showing gains of 43 percent since the end of 2009 and hitting a nine-year high earlier this month.

"We forecast that palladium will likely see one of the strongest increases in intensity of use of any commodity to 2015," UBS said.

The bank also said it saw gold as a good bet. "In a low cost-of-capital world, be long gold," it said.

It lifted its gold price forecast for 2010 to $1,228 an ounce from $1,205, for 2011 to $1,400 an ounce from $1,295, and for 2012 to $1,250 from $1,175.

UBS said it favored gaining exposure to gold prices via gold stocks rather than physical gold, though some risks remained to share investments due to uncertainty over operating costs and conditions and rising political uncertainty.

Among stocks, the bank identified Rio Tinto (RIO.L), BHP Billiton (BLT.L), Barrick Gold (ABX.TO), Teck Resources (TCKb.TO) and Adaro Energy (ADRO.JK) as its top picks.

The bank said its least preferred commodities were those for which supply is relatively unconstrained, such as nickel and aluminum.

(Reporting by Jan Harvey; Editing by Jane Baird)

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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