Commodities to Rally on Fed ‘Game Changer,’ UBS Says

Oct. 19 （Bloomberg） -- Commodities will rally if the U.S. Federal Reserve eases monetary policy next month, according to UBS AG, which describes a likely second round of quantitative easing as a “game changer” for copper, iron ore and gold.

The additional measures to boost the world’s largest economy will increase capital flows to emerging markets, reinforcing commodity-intensive growth, the Swiss bank said in a note to clients today that summarized a commentary from Oct. 18. UBS’s other top picks included palladium, thermal coal and zinc.

Federal Reserve Chairman Ben S. Bernanke said last week that additional stimulus may be warranted because inflation is too low and unemployment too high. The comments have prompted a decline in the dollar, boosting commodities including gold, which surged to a record. The Fed’s renewed easing may total more than $1 trillion, according to Goldman Sachs Group Inc.

“Recent Fed commentary makes it a virtual certainty that we will get QE2 at the next meeting on Nov. 3,” the note said, referring to additional quantitative easing by its initials. This “will be a game changer for commodities,” it said.

Three-month copper on the London Metal Exchange rose as much as 0.6 percent to $8,492 a metric ton today, the highest price since July 2008. The metal used in pipes and wires has advanced about 31 percent over the past year, boosted by shrinking stockpiles, increased demand and the weaker dollar.

Gold’s Record

Palladium for immediate delivery gained to a nine-year high of $605.13 an ounce on Oct. 14, while spot gold touched an all- time high of $1,387.35 an ounce the same day. Raw materials as measured by the Thomson Reuters/Jefferies CRB Index have gained 5.4 percent this year, after a 23 percent advance last year.

After lowering U.S. interest rates almost to zero and buying $1.7 trillion of securities, policy makers are discussing expanding the Fed’s balance sheet by purchasing Treasuries and strategies for raising inflation expectations, according to the minutes of the Federal Open Market Committee’s Sept. 21 meeting.

Additional quantitative easing “means that strong, international capital flows will reinforce already powerful domestic credit creation in emerging markets,” according to the UBS note. “That should flow through to robust, commodity- intensive growth in emerging markets, while the developed world struggles in the face of higher commodity prices.”

Top equity picks included BHP Billiton Ltd., the world’s largest mining company; Rio Tinto Group, the third-largest; PT Adaro Energy, Indonesia’s second-largest coal producer; and Teck Resources Ltd., Canada’s biggest base-metals miner. All have a “buy” rating, the UBS summary said.

Nickel and aluminum are among the least-preferred commodities because supply of the metals is “relatively unconstrained,” the note said.

At the Fed’s meeting next month, central bank purchases of about $500 billion of Treasuries may be announced, according to a note from Goldman Sachs sent last week. Given the outlook for continued economic weakness “the size of the purchase program will ultimately total at least $1 trillion, possibly considerably more,” the Goldman note said.