Commodity returns could rise another 66% by year end as cyclical and structural support remains and the asset class continues to be a hedge on geopolitics, according to Goldman Sachs.
After recommending a long on commodities (BCI) (GSG) going into 2024, the team of analysts says: “Three months into the year, we reiterate our view, with Commodity total returns (YTD at 9%, which we expect to rise to 15% by year-end, including over 20% in select sectors).”
A trough in global PMIs, supported further by central banks cutting interest rates, will help demand and prices, “particularly across copper (HG1:COM) (NYSEARCA:CPER), aluminum (LMAHDS03:COM) (ALUM) and oil products (CL1:COM) (CO1:COM) (USO) (BNO),” they said.
“Our expectations of higher commodity demand driven by stronger industrial and consumer activity are further reinforced by our economists’ strong conviction of rate cuts in the US, in line with this week’s Fed projections, and the ECB starting from June this year,” the team added. “Rate cuts will help lower the cost for industrial wholesalers to restock on industrial products, while supporting the financing of durable goods purchases by households.”
“Specifically, we find that US rate cuts in non-recessionary environments lead to higher commodity prices, with the biggest boost to metals (copper and gold (XAUUSD:CUR) (NYSEARCA:GLD) in particular), followed by crude oil. Importantly, the positive impact on prices tends to increase with time, as the growth impulse from looser financial conditions filters through.”
They also note strong green metals demand and oil margins and the role of commodities as a geopolitical hedge.
Looking to specific targets, Goldman predicts copper rise to $10,000 per ton by year end, with aluminum at $2,600. Brent crude will be “well supported” at the top end of the $70-$90 per barrel range. And gold could hit $2,300 per ounce as 2024 wraps up.
