Goldman Sachs, in a recent report, underscores the potential for commodities to rally amidst declining interest rates.
This observation gains significance as several major financial institutions anticipate a series of rate cuts in the current year, possibly up to three, though some Federal Reserve officials are reportedly questioning the appropriateness of such a number given the persistent higher-than-average inflation.
The report from Goldman maintains an optimistic stance on commodities, projecting attractive total returns of 15% by the end of the year, with certain sectors expected to yield returns surpassing 20%.
A significant finding from the bank’s analysis is the historical correlation between commodities and interest rates.
Goldman analysts highlight that commodities have historically surged when interest rates were lowered in a non-recessionary climate, a trend indicating favorable conditions for the sector.
The accompanying chart demonstrates the potential price fluctuations for various assets following a 100 basis point (bp) decline in rates, with copper and gold emerging as the primary beneficiaries among metals.
Goldman attributes this correlation to several factors, including heightened demand for raw materials as borrowing costs decrease and the inclination of investors towards alternative assets in a low-yield environment.
Recent drivers of this trend include the rebound in global manufacturing as companies replenish inventories, ongoing geopolitical tensions, and the prospect of a gentle landing for the U.S. economy, evading recession.
Additionally, demographic shifts such as aging populations and raised levels of public debt point towards a more inflationary backdrop for the broader economy, potentially prompting investors to allocate more towards commodities as a hedge against inflation.
Allianz anticipates the Fed to pivot in July, delivering a total of 100bps in rate cuts by the end of 2024, and an additional 75bps by the end of 2025. The firm’s outlook stems from the Fed’s more dovish stance and progress made on the inflation front.
Similarly, the European Central Bank (ECB) is expected to lead this rate-cutting cycle, initiating interest rate reductions in July, albeit a few days before the Fed, driven by differing economic conditions in the eurozone vis-à-vis the U.S.
In addition to the potential impact of interest rate cuts, forecasts of rising oil and energy demand are also influencing the commodities market.
The International Energy Agency (IEA) recently revised its estimate of 2024 oil demand growth upward, citing an improved economic outlook for the U.S. and increased bunker fuel consumption due to the Red Sea attacks.
The ongoing crisis, exacerbated by attacks on commercial vessels by Yemen’s Houthi forces, has led to extended journey times and higher shipping costs, thereby bolstering oil prices. Furthermore, geopolitical tensions intensify with reports of threats to Saudi Arabia’s oil installations by the Houthis.
Another near-term factor affecting the commodities market is the temporary closure of the Port of Baltimore following the tragic collapse of the Francis Scott Key Bridge.
As the second-largest coal exporting hub in the U.S., this closure is anticipated to impact bunker fuel consumption and may affect the volume of U.S. coal exports in 2024.
Approaching the commodities sector requires a discerning and well-informed strategy. The Goldman Sachs report advises investors to consider both cyclical and structural factors, alongside geopolitical risks when making investment decisions.
By carefully analyzing these factors and maintaining a diversified portfolio, investors stand to capitalize on the potential opportunities presented by the commodities market.
