Commodities Are Past the Worst, But Don’t Rejoice Yet

While raw materials are no longer slumping, Goldman isn’t that impressed.

Give Goldman Sachs credit for zigging while the market is zagging. The venerable Wall Street firm has for months been recommending commodities, even as they slumped badly. But now, with a recovery underway, Goldman has turned cautious.

Commodities have been on a slow climb during 2018, peaking in October, and then losing 22% over the next two months. Goldman admitted that it had “failed spectacularly” during last year’s final quarter in judging commodities. Now, though, the asset class has perked up. Since bottoming out on Christmas Eve day, commodities have risen 10%.

While that’s still shy of the October peak, macro developments that were so discouraging in late 2018 now are looking up, according to a research note from Goldman’s analysts. They reasoned that commodities are largely moving past a “soft-patch in global macroeconomic data, as temporary drags on growth (particularly US government shutdown effects) are removed, and policy has turned more expansionary (particularly in China).”

Still, the lack of government dysfunction in America and a re-boot of stimulus in China simply means that raw materials are no longer undervalued, they wrote. And so, before breaking out the champagne, Goldman wants to see more evidence of better fundamentals from commodities. “The risk-reward of being outright long commodities,” the report said, “is therefore less compelling now compared to a few months ago.”

The best spot on the commodity spectrum is oil, Goldman said. OPEC megalith Saudi Arabia is reducing production faster than US shale drillers can increase output, plus the chaos and trade sanctions roiling petro-producer Venezuela are cutting into world supply. Result: Higher oil prices could lie ahead, with the price per barrel reaching as high as $75. Brent crude is now $66. But the analysts think this situation may be temporary.

Meanwhile, however, Goldman didn’t find the rest of the commodities class very compelling, as “better data is not yet apparent.” The Goldman paper expressed disappointment at economic results coming out of China thus far, and China has been a powerful buyer of commodities in the past. The note was most downbeat about metals, like copper.

Goldman’s lone shiny spot among metals was gold, whose refuge status in a time when recession fears are stewing make it a go-to investment for some. Cold comfort, that.

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