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Why Supply Side Is Key When Trading Commodities - Goldman Sachs

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Why Supply Side Is Key When Trading Commodities — Goldman Sachs

(Kitco News) - Gold and oil failed to spike as high as expected this year, with one analyst explaining why the supply side matters when trading commodities, warning that they are not anticipatory assets.

“We learned important lessons when trading commodities. First is that commodities are not anticipatory assets — they can’t price the future, they have to price today,” head of commodities research at Goldman Sachs, Jeff Currie, told Bloomberg on Wednesday.

Technological changes and the supply side are very important for commodity assets, such as oil and gold, Currie explained.

“[For example], the mistake the market made after October was that it tried to price in a production cut, which created distortions. But, guess what? The supply responded to it. Everyone was caught off guard how quickly it can respond.”

Another lesson Currie cites goes back to the agriculture market. “Any good agriculture trader doesn’t trade next year's crop. This also applies to other commodities — you can’t be trading oil three to six months out because supply can respond,” he said. “When you put these lessons together, you see that you can’t be trading long-dated oil anymore.”

The takeaway for Currie from this is that volatility in the derivatives markets is going to slowly disappear.

“The technologic innovation is spot on in terms of what really changed here. We learned our lesson over the last six months to respect the velocity of supply,” Currie added. “Supply was always considered fixed, but the reality is now that supply can move faster than demand. And that is what really changed.”

In their latest report published late-June, the bank was relatively neutral on gold, saying prices will hover around $1,250 an ounce by the end of 2017 and first half of 2018.

“We expect higher U.S. real rates and Fed balance-sheet reduction to put downward pressure on gold,” Goldman said in its outlook.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.