SINGAPORE – Goldman Sachs Group is standing by its very bullish call on commodities, saying that the recent global markets selloff only bolsters its view that raw materials are set to perform well in the months ahead.
“Commodities proved to work just as advertised” during the equity-led declines, Jeffrey Currie, the bank’s head of commodities research, said in an interview on Bloomberg Television from Hong Kong on Wednesday. “In fact, you saw base metals and gold trade up as the equity market went down.”
Global markets have been roiled in the past week after a two-day rout in US equities spilled over into commodities and other assets, before Wall Street rebounded in Tuesday’s session. Ahead of the tumble, Goldman threw its weight behind raw materials in a February 1 note, saying that it’s more bullish on commodities than any time since the end of the supercycle in 2008. As economies around the world pick up, factories are humming, eating into stockpiles and driving raw material demand, according to the bank.
“Historically, when you look at commodities they perform very well during rate-hiking cycles,” Currie told Tom Mackenzie in the interview. “Oil’s what we called backwardated, where spot prices sit above forward prices, so you buy at a discount and roll up the curve. In other words, it pays you to be long.”
The Bloomberg Commodity Index rallied in late January to the highest level since October 2015, aided by gains in metals and oil. While the index did drop in the three days to Tuesday, the losses were smaller than seen among equity benchmarks. During the selloff, other analysts also reaffirmed their positive outlook, with Citigroup backing metals over bonds.
FED'S RESOLVE
The Federal Reserve has raised rates five times since 2015, and Goldman sees more increases on the way. Policy makers signalled at their January meeting they expected the US economy to warrant “further” gradual hikes, and Goldman’s chief economist Jan Hatzius said this week the Fed’s on course to raise borrowing costs four times this year and four more times in 2019.
“During the rate-hiking cycle industrial metals are up on average 50% per annum: we did 30% last year,” said Currie. “So again, we’d think again that in this type of environment, this is what commodities were intended to perform really well. And what we’re seeing so far is spot on.”
Among the targets in the February 1 report, Goldman forecast copper rising to $8 000/t in 12 months, Brent crude topping $82 a barrel within six, and iron ore gaining to $85/t in three. On Wednesday, copper was little changed at $7 071 after falling 1.3% the previous day, Brent climbed 0.3% to $67.09, and spot iron ore was last at $75.92.
Currie said reforms in China, where policy makers have moved to reduce excess capacity, also aided raw materials as they improved utilization rates and helped companies to cut debt loads. “When you look at the supply-side reforms in China, they’ve been absolutely brilliant,” said Currie.