Goldman Sachs expects a bull market in commodities next year and sees 30% returns over the next 12 months from a basket of commodities.
“Given that inventories are drawing this early in the cycle, we see a structural bull market for commodities emerging in 2021,” said Goldman Sachs analysts led by the head of commodity research Jeffrey Currie.
Goldman sees inflation returning
“We see trends in rising social need, alongside investor complacency over inflation, as raising the political risks of policy with an inflationary bias,” said Goldman Sachs analysts. They added “Accordingly, we expect an increased rotation into commodities as an inflation hedge.”
Commodities tend to do well in periods of high inflation. A weaker dollar is another positive for commodity prices as they have a negative correlation with the dollar. Commodities are traded in the US dollar so a fall in the greenback makes commodities cheaper to buy in other currencies.
While the US dollar was strong in the early days of the pandemic, it has been weak thereafter. A massive fiscal and monetary policy stimulus has pressurized the greenback. Also, many see the fall in the US dollar as a reflection on how the country has handled the pandemic. The US has the highest number of virus cases as well as fatalities globally.
How commodities could react to US elections?
Goldman Sachs sees a bullish case for commodities if Joe Biden wins the upcoming US elections. It expects US copper demand to rise 2% every year for the next five years under Biden’s plan. That said, commodities had rallied in 2016 after Donald Trump’s surprise election. Trump had vowed to invest substantially in the infrastructure sector in his tenure. Infrastructure investments boost demand for commodities like steel, aluminum, and copper. However, Trump’s trillion-dollar infrastructure plan never really took off even as the President delivered on some others of his pre-election promises like the tax reforms.
Goldman Sachs provides a forecast for commodities
Goldman Sachs has also provided its forecast for different commodities. It expects gold prices averaging $2,300 per ounce in 2021. Currently, the yellow metal is trading around $1,915 per ounce. Most brokerages have a bullish view of gold.
Bank of America is forecasting the yellow metal to reach $3,000 per ounce by the end of 2021. Frank Holmes, chief executive at investment firm US Global Investors expects prices to reach $4,000 per ounce, forecasting a more than 100% rally over current levels.
LearnBonds – Author: Mohit Oberoi – Last Updated: October 23, 2020