Despite the worst economic recession since 1945, RBS asserts, we have had a telescoped commodity cycle, with peak to trough in just nine months against an average of 41 months for previous recessions. From trough halfway back to peak has taken just nine months. For the short term, it's now about the economic macro delivering along with exit strategies working In Royal Bank of Scotland (RBS') latest quarterly Commodity Companion, entitled "Headwinds", the investment bank is looking for the emergence of "deep inventory-draining deficits" in the commodities markets as we move towards the second half of late 2013, with the world economy fully back in its stride and commodities in general likely to be in an effervescent mood. The bank's favoured metals on a four-year view are palladium, aluminium, nickel, platinum and copper. Oil and gas are also expected to be substantially higher, with natural gas gaining as much as copper, but not as much as the other highlighted metals. The bank has also compared its forecasts for the average prices for Q4 2010 against an average early December 2009 price and the clear winner is palladium with a projected gain of 13%. Oil comes in second with an expected 8% increase, while gold and zinc are expected to be down by 14%. Other metals expected to be in the negative column by the end of next year are lead, silver and nickel. The study notes that the "noughties" were the decade in which commodities became a mainstream asset class. At the start of the decade commodities were high risk, "too edgy and for consenting adults only". Since the end of 2008, however, the RBS Base Metal Price Index has gained more than 80% and the CRB Commodity Index is up by more than 30%, while physically-backed ETFs were valued at over $70 Bn towards the end of 2009. RBS underlines how commodity markets have benefited in 2009 from the "myriad government financial stimulus packages" as well as the massive stockpiling exercises that have taken place in China over the past year. The 2010 story is therefore expected to be all about the success of the economic macro, the unwinding and exit strategies of stimulus packages and the conclusion of stimuli that have effectively been commodity specific. The bank is looking for a modest relapse in base metal prices in 2010 and believes that we will have to wait until 2011 before the position brightens. We are already twelve months into the recovery, with the RBS Index up 90% and eclipsing the recoveries from the December 1975 trough and the November 1982 trough. China is the key difference this time with 40% of world metal consumption, compared with negligible levels in the previous two recessions. There are a number pf potential problems to be encountered in 2010, notably the path of the US dollar and a considerable reduction in investor appetite for risk. The trade-weighted dollar hit a 2009 high in March (89.6) before sliding to 74.1 in November - a fall of 17%. Meanwhile the S&P 500 Volatility (VIX) index has, after soaring in late 2008, now slid to below levels prevailing before the collapse of Lehman Brothers. These two features have helped to people the rebound in commodities prices during the year. Looking forward RBS has identified a number of events likely to materialise this year that will "prove to be headwinds to commodity price progression in 2010 and beyond". These include the following; · Higher taxes around the world to help pay for the financial crisis · The spectre of long-term unemployment, with unemployment itself still rising (this is partly a demographic issue, including ageing populations) · Reduced leverage and commodity exposure among financial institutions. There is already evidence of funds reducing the length in the commodities markets and planning to be more selective next year · Massive cuts in government spending programmes as part of the process of reducing the massive deficits that have been built up since late 2008 · Rising world interest rates with a view to combating incipient inflation. RBS expects rates to be accomodative in 2010, but to be rising · End of US dollar weakness As well as shifts in these important drivers in the markets, there are fundamental issues at stake including natural resource companies looking to increase capital expenditure in the pursuit of organic growth, while China reduces import levels and releases some of its stockpile holdings into the world markets. These different elements are considered in detail in the study, as are many other parameters quite apart from the fundamentals of the individual commodity markets. The overall flavour coming from the study, however, is that while longer-term view is rosy, a number of commodity prices will struggle for part of 2010 as the commodity paradigm shifts slightly in the face of macro readjustments.

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