Goldman Sachs: Buy commodities now, worry about recession later

By Eleftherias Kourtalis

Overblown recession fears gripped commodity markets, particularly oil, in June, in one of the worst monthly performances in 8 years. Since then, major commodity indices have recovered, but prices for crude, petroleum products, aluminum, wheat and corn, among many others, remain well below previous highs. Judging by recent price action, Goldman Sachs finds that commodities are pricing in the onset of recession more than any other asset class.

However, Goldman economists see the risk of a recession outside Europe over the next 12 months as relatively low. Macro data shows a slowdown, but no contraction, as weakness in manufacturing contrasts with a still strong services sector, partly due to a tourism boom.

Moreover, none of the economies that made early interest rate hikes are now in recession, while all continue to have high inflation. According to Goldman, it is very likely that the economy will remain in this end-of-cycle period for some time to come.

Commodities are the best asset to own in such a period of the economic cycle, as emphasized by the American bank. Stocks could take a “sharp hit” if inflation remains high and the Fed is more likely to continue its aggressive monetary policy. “We think commodities, on the other hand, are the best asset class during this end-of-cycle phase where demand remains above supply,” Goldman notes.

So, as the bank’s strategists see a renewed decline in risk appetite in the markets, the correlation of commodities with other risk assets will decline again. Corroborating this view, physical fundamentals signal some of the tightest markets in decades.

In particular, inventories in almost all commodity markets are well below their 5-year average. As further falls in inventories trigger risks of depletion, commodity returns for investors are likely to strengthen. In fact, according to Goldman, the risk of running out of reserves is significantly greater than the risk of a global economic recession. “Accordingly, the 12-month outlook for commodities is positive and we raise our forecasts for the total returns of the S&P GSCI and BCOM commodity indices to 38.3% and 13.6%, respectively, for the period.

Goldman estimates that commodities such as crude oil, oil products, European natural gas and thermal coal have already entered the – extremely volatile – second phase of the rally. This trend is expected to spread to base metals, especially copper, and some agricultural commodities such as corn and soybeans.

That doesn’t mean the short-term outlook isn’t fraught with risks, Goldman Sachs notes. “We recognize that the macroeconomic landscape remains challenging and the US dollar could rise further in the near term, which will impact commodity markets,” he points out.

However, he points out that the eventual realization that fears of a recession in the next 12 months (outside Europe) are likely to be unfounded could trigger a wave of inflows by commodity investors.