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Goldman Sachs Remains 'Overweight' On Commodities

Kitco News

Editor's Note: Updating earlier story with more details from report.

(Kitco News) - Goldman Sachs analysts are maintaining an “overweight” rating on commodities despite recent weakness in the complex.

Commodities are still the top-performing asset class of 2018, although they fell in June due to weaker emerging-market demand, trade-war worries and supply concerns in the oil market, Goldman said in a report published Wednesday.

“We believe all of these concerns have been oversold,” Goldman said. “Even soybeans, the most exposed of all assets to trade wars, [are] now a buy. The momentum in oil has already turned on news of tighter Iranian sanctions and additional supply disruptions. In metals, we believe Chinese domestic concern over credit availability has been the primary driver of recent weakness, fueled by trade wars, and is set to reverse given recent policy shifts in China.”

The bottom line -- Goldman said it still favors being “overweight” on commodities, forecasting a 12-month expected return of 10%. The recent weakness is a “buying opportunity,” Goldman said.

“The pillars of our view remain: 1) strong late-cycle commodity demand that depends on demand levels rising and not slowing growth rates, 2) supply disruptions in key oil and metal markets which are exacerbated by recent sanctions, [and] 3) depleting inventories which create increasing positive carry in nearly all energy and metal markets.”

The report forecast that the U.S. dollar “will likely weaken from here.” A softer greenback generally means higher commodities demand since it makes them cheaper in other currencies. Goldman pointed out that previously, divergence in global economic growth not only boosted the dollar but pushed gold below $1,250 an ounce. However, Goldman continued, Japanese and European economic weakness “is now behind us.”

Goldman said it looks for restocking of commodities to pick up.

Meanwhile, easing of monetary policy in the critical commodity-consuming nation of China should support industrial metals, Goldman said. For example, analysts cited a People’s Bank of China’s decision to cut the reserve ratio requirement by 50 basis points, effective Thursday. Further, the prospect of a trade war may make Chinese authorities even more accommodative, Goldman said.

“Industrial profits continue to expand and private investment grows at a brisk pace,” Goldman said. “The combination of stable demand and policy easing should support metals demand in 2018 H2.”

In the case of oil, Goldman said there are “significant supply risks” despite an effort by OPEC to increase output. Analysts look for the market to remain in deficit in the second half of 2018 despite higher production by core OPEC producers, with “rising supply threats elsewhere potentially threatening a sharp further rise in prices and global economic growth.” Production is most at risk in Iran as the U.S. administration targets a decrease in Iran’s exports, Goldman commented. Additionally, Venezuelan output continues to decline, Libya’s output has been disrupted by violence, and Canadian production will likely be down by 360,000 barrels through July because of an outage at the Syncrude Canada plant.

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