Commodities of all stripes will rally in 2018: Goldman Sachs

By Nick Cunningham

Goldman Sachs continues to ratchet up predictions for commodities, laying out a bullish case for commodities of all stripes in 2018. The investment bank said that its forecast a year ago for higher commodity prices "played out much better than expected." The bank pointed to industrial metal prices, which are up 24% this year, plus the 13% increase in oil prices.

But looking forward, Goldman sees plenty of room to run. "The demand backdrop today is now even stronger than a year ago, with robust and synchronous global growth clearly evident," Goldman analysts, led by Jeffrey Currie, wrote in a December 11 research note. The extension of the Opec deal also led the bank to revise up its forecast for oil prices, as inventories should continue to fall throughout 2018. There are other reasons to be bullish on commodities. The investment bank argues that commodities tend to outperform other asset classes when central banks move to tighten rates.

That is because rate hikes typically occur when demand is exceeding supply - the higher prices resulting from that mismatch are why central banks are trying to raise rates, but it is those higher prices that support the investment case into commodities.

The report concluded that "a positive carry in key commodity markets and already strong global demand growth across the commodity complex reinforces the case for owning commodities. And hence we maintain our 12-month overweight recommendation, now with a forecasted return of almost 10%." On top of that, Goldman argues that it "pays to be late and enter commodity markets as the business cycle matures." The logic is that in the oil market, for instance, futures are in a state of backwardation, which makes investing highly attractive.

"The reason for this is that once the returns are based upon carry and less on price appreciation, the persistence of the carry delivers more stable and dependable returns," Goldman wrote.

And because the oil futures market is not heading back into a state of contango next year, the "persistent level of backwardation [will be] the primary driver of returns next year," the investment bank predicts. "More speci?cally, we see 15% returns next year from the role yield in oil and 10% yield from the roll yield across all commodities"