Goldman Sachs says it won’t be ‘hoodwinked’ on commodities again
Goldman Sachs Group Inc is standing firm with its bullish bet on commodities even after being “hoodwinked” by a shift in investor sentiment that pummelled prices late last year.
The bank expects 12-month returns of 9.5% from the S&P GSCI gauge of raw materials, and sees value in oil and metals after a volatile December, according to a January 10 report.
The bank also raised its gold price forecasts on increasing policy uncertainty and as the US Federal Reserve pauses interest rate increases, analysts including Jeff Currie wrote in the note.
Goldman is sticking to its bet after a fourth quarter in which the bank’s justification for owning commodities, according to the analysts, “failed spectacularly.” For most of 2018, the world seemed to be in a “late-cycle” environment that supported commodity prices.
As prices tumbled, though, data pointed to the world being in more of a “mid-cycle” period, according to Goldman.
“So what happened to the late-cycle playbook?” Currie wrote. “The answer is that it wasn’t as late cycle as we had initially thought.”
The fourth quarter sell-off, in which oil prices tumbled almost 40%, had more to do with the unwinding of exuberant sentiment than a deterioration in fundamentals, Goldman said.
Supportive economic policies in China, the world’s biggest consumer of most commodities, a weakening dollar – which increases the allure of raw materials priced in the greenback – and Opec’s commitment to shrinking a crude glut now support the bank’s bullish view, it said.
“A mid-cycle pause is a buy signal for commodities,” Currie wrote. “With rates now on hold and the dollar expected to weaken from current levels, the current rally in oil and commodity prices is unlikely to run into the same headwinds as it did in June and July of last year.”
Consumption also disappointed last year, as it became apparent that a period in which emerging and developed markets would grow together is unlikely.
That’s partly due to governments of emerging nations like China that aggres- sively manage their growth in way that moves counter to developed countries.
It’s also due to declining demand for big-ticket items such as homes and cars in developed markets.
“Part of this has to do with saturation of demand, but there is also a shift in preferences within the millennials,” Currie wrote. “This is critical as durable goods demand is a key driver of economic cycles since the consumption is lumpy.”
Still, Goldman said that investors should look out for “idiosyncratic opportunities” this year. “We won’t be hoodwinked in 2019 by weaker sentiment, which is why we maintain our overweight recommendation despite modest downward revisions in our oil and metal forecasts earlier this week,” the bank’s analysts wrote.