Home Commodities Why Commodities Have More Room to Run up, GS Says

Why Commodities Have More Room to Run up, GS Says

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  • As stocks slide investors will be increasingly thinking about other options for their money.
  • Goldman Sachs pointed to real assets as offering “a welcome source of diversification”.
  • Goldman analysts also revealed their price targets for a basket of commodities including oil, industrial metals and gold. 

As the stock market continues to slide, investors will be increasingly thinking about other places to put their money.

While sitting in cash is of course an option, it may not be a good one given inflation is running at 6% in the US and even higher in many other places. The purchasing power of wealth left in cash is eroding at an alarming rate, so investing elsewhere may be the smarter move.

Real assets, commodities in particular, are potentially the answer. As the name suggests, these are tangible things that exist in physical form such as oil, industrial metals, gold, rare earths and various foods such as wheat. Things like art, fine wine and classic cars are also real assets, but Goldman does not focus on them. 

One much-heralded feature of real assets is that they are not correlated with the stock market. This is far from guaranteed to be the case all the time, but over long timeframes this has been true for the majority of recent history.

Typically, commodities will perform well in a rising interest rate environment such as the one we have now, in stark contrast with stocks.

Of course, prices across many commodities have already moved up significantly over recent months so there’s a risk most of the upside is already priced in, but there could easily be further to go this year.

This is not a reality that has escaped the attention of the big investment banks and asset managers. Goldman Sachs is touting the benefits of investing in real assets and believes economic conditions could allow for continued price rises.

In a recent note for clients, Goldman’s Sabine Schels and Mikhail Sprogis laid out the case for adding more real assets to investment portfolios.

“While balanced portfolios have had a tough time digesting the surge in bond yields, commodities remain a welcome source of diversification in multi-asset portfolios amid low correlations and stable risk-adjusted returns.”

“Chinese lockdowns have managed to avert the worst-case stockout conditions in metals and energy, but they have also masked worsening supply conditions as European sanctions begin to bite in crude markets and base metals struggle in the face of water scarcity, lack of supply investment and declining ore quality. Such scarcity should keep markets tight and returns well diversified.”

Crude oil has gained around 45% so far this year, while natural gas has risen by 116% and base metals such as nickel and aluminum have risen by 35% and 5%, respectively.

The Goldman Sachs team also pointed to “exceptional carry” in the market right now. This refers to the costs of transporting, storing and insuring real assets versus the rise in their prices.

“An exceptional carry regime has also allowed investors to find shelter in commodities, with carry delivering 16% roll returns annualized, thus adding another layer of uncorrelated returns,” they wrote.

They did warn however that this opportunity could fade away later on in the year. “High inflationary periods tend to be associated with steeper backwardation, particularly in energy, and so a continued strong inflation backdrop could support backwardation,” they said.

Backwardation is a market situation where the current price, known as “spot”, is higher than prices quoted in the futures market.

“Although term structures could flatten gradually by year-end if commodity flows normalize, we expect carry to remain positive on structural underinvestment even in a rising rate environment. In the case of additional supply shocks, we could even see a further steep backwardation regime that will fuel


volatility

.”

In terms of which assets in particular the Goldman team are most bullish on, the table below outlines their 3, 6 and 12 month forecasts. Standouts include nickel,


zinc

and gold. 

GS real assets



Goldman Sachs


While most investors do not have the means or will to directly acquire and store large quantities of the various assets listed, exposure to most of them can be gained through exchange-traded products available from the usual online stockbrokers. 

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