(Kitco News) - Until prices hit $2,000 an ounce, the gold market is still "some way" from displaying the characteristics of a bubble, according to major bank research note.

In its commodities quarterly report released Tuesday, Deutsche Bank said while "market concerns are focusing on the magnitude and duration of the gold price rally," values would need to move above $1,455 to be considered extreme in real terms. They said the accommodations the Federal Reserve may make to prop up the U.S. economy could mean more quantitative easing by the next Federal Open Market Committee meeting in November. Combine this with seasonal weakness for the U.S. dollar in the final four weeks of the year, and further gains for the precious metals complex are possible.

The bank slightly lowered its 2010 average price forecast for gold by 2.8% from its previous estimate to $1,211, but did not say why. It maintained its 2011 price target of $1,450.

For the other precious metals markets, the bank lifted its 2010, 2011 and 2012 average price estimate from previous calls for silver and palladium and lowered its price target for rhodium for the next five years. It slightly lowered its 2010 forecast for and platinum and left unchanged the 2011 outlook.

Deutsche Bank said the worries about gold being in a bubble are overblown and pointed to the rally in oil. From its 2001 low to its 2008 high – which surpassed its 1970s/early 1980s records – oil rallied over 730%. Comparatively, gold's rally from 2001 is just over 400%. To replicate oil's performance, it would need to rise to $1,455 an ounce (producer price index adjusted). "In addition, when valued against other financial and economic indicators, gold prices can also not be considered excessive, in our view," the bank said.

The bank said sluggish U.S. gross domestic product growth means a continued low-interest-rate environment and the chance for new lows for the U.S. dollar heading into 2011. Silver and the platinum group metals could outperform gold if "global growth remains resilient despite the downside risks to U.S. GDP growth," the bank said.

The bank lifted its current silver price estimate by 3.0% to $19.10 an ounce for 2010, raised its 2011 forecast by 10.2% to $24.25 and the 2012 forecast by 12% to $28. The platinum forecast for 2010 was cut by 1.7% to $1,601 an ounce and the 2011 forecast was left unchanged at $1,750.

The bank believes the global economy will avoid deflation, but the "relentless" decline in core inflation during the past two years has heightened market worries that the U.S. and Europe will be caught in the same trap as Japan. "While deflation would tend to indicate a rise in real interest rates and a potentially bearish environment for precious metals we doubt this would be appropriate given the implications deflation would pose for the US dollar and investor appetite for physically backed gold ETFs," the bank said.

Deutsche bank said the rally in gold prices is fundamental. "However, we believe the rally has the properties of turning into a speculative bubble given that investors seem to be eager to buy gold on inflation and deflation and gold's ability to rally in rising and falling US dollar environments," they said.

Platinum prices are likely to be pulled by gold, the bank said, with demand for palladium also a factor. An expected rebound in auto demand should lead to market deficits. They see market deficits of 215,000 ounces in 2010, 170,000 ounces in 2011 and 120,000 ounces in 2012. But if gold and palladium do not produce support and auto sales are less than expected, platinum could swiftly swing back into surplus.

The bank forecasts palladium to average $492 an ounce in 2010, a 2.4% rise from a previous outlook, with supplies in a modest deficit for the next three years because of auto demand from emerging markets. In 2011, it forecast palladium prices at $580, up 10.5% from before and at $650, a 13% increase from its previous view.

It downgraded its outlook for rhodium by 6.5% to 16.7% from its previous outlook because of likely surpluses for the foreseeable future. The bank now sees 2010 rhodium prices at $2,442 an ounce, a 6.5% decline from before, and 2011 prices at $2,500, a 16.7% fall from a previous view.

Industrial metals could see more upside in the third quarter, the bank said, as more exchange-traded funds make it easier to invest in the sector. The metals most likely to be impacted by new ETFs are copper and lead – "if and when they are listed," the bank said. This new source of demand for base metals will have a "strong impact on the shape of forward curves across the sector" and could reduce the degree of contango on the forward curves. It forecast copper prices for 2010 at $7,357 a metric ton ($3.3370 a pound), a rise of 9.0% from their previous forecast, and also lifted its 2011 estimate by 7.1% to $8,267 a ton ($3.75 a pound).

By Kitco News

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