Publications

- February 1, 2019: Vol. 6, Number 2

Comeback trail: Nowhere to go but up for commodities

by Mike Consol

The Goldman Sachs Group, undaunted by the sell-off in raw materials, is bullish on commodities and is forecasting returns of about 17 percent in the coming months.

Bloomberg reports analysts, including Jeffrey Currie of Goldman, wrote: “Given the size of dislocations in commodity pricing relative to fundamentals — with oil now having joined metals in pricing below cost support — we believe commodities offer an extremely attractive entry point for longs in oil, gold and base.”

Raw materials were battered in November by a toxic cocktail of drivers, Bloomberg reported, with crude sinking amid speculation there is too much supply, metals getting hit on concerns growth is slowing, and investors fretting about the effects of a U.S.-China trade war.

Meanwhile, the S&P Commodity Index is very low, indicating now may be an ideal time to buy commodities, adds Seeking Alpha, which notes the last time commodities were this cheap in relation to equities was in 1999. From the 1999 lows to 2008 highs, the Goldman Sachs Commodity Index increased more than five-fold.

The Financial Times points out the new era of quantitative tightening and gradual withdrawal of liquidity from the global financial system is likely to have wide-ranging implications for investors with regard to commodities. Duration risk, inflation risk, constraints on market liquidity, and a lack of diversification are among investors’ concerns, and commodities can help investors address those concerns and enhance the overall stability of their portfolios.

Although short-dated fixed-income investments can help to lower duration risk in investors’ portfolios, FT says commodities offer greater protection against rising rates compared with financial assets more broadly, as they have historically outperformed stocks and bonds in a rising-rate environment.

“We believe this traditional advantage offered by commodities will become even more apparent as the rising rate-cycle persists,” the newspaper writes.

 

Mike Consol (m.consol@irei.com) is editor of Real Assets Adviser. Follow him on Twitter @mikeconsol to read his latest postings.

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