(Kitco News) Commodities are a key asset class to own during the current market volatility, but one commodity, in particular, offers a "welcome opportunity," according to Goldman Sachs.
This outlook goes against this year's underperformance of the commodities sector.
The essential commodities to diversify with are the oil and agriculture sectors, Goldman said in a note this week. "Oil and pockets of the agriculture sector offer investors welcome opportunities for portfolio diversification at a time that the tactical outlook for other asset classes remains cautious," the bank wrote.
Commodities are expected to offer returns of 12.8% in the next three months, 21.1% in the next six months, and 34.9% over the next 12 months, the note said, referring to the oil-heavy S&P GSCI Commodity Index.
The energy sector is projected to see returns of 46.7% over the next 12-month period, while industrial metals are expected to offer 29% and precious metals 23.8%.
Commodities have been underperformers year-to-date due to the aggressive tightening of monetary policies worldwide and growing global recession risks.
"Even if the macro picture remains blurred, commodity markets, particularly oil, also follow their own tempo, driven by micro fundamental factors and OPEC+ cuts, low stocks and low spare capacity that is supporting prices," Goldman said.
Oil is down more than 30% since hitting its March highs, and base metals have struggled due to China's zero-COVID policy and a slowdown in the global economy. But despite the gloomy economic outlook, shorting metals is a risky business, the bank warned.
"Upside risks created by a potential LME (London Metal Exchange) ban and tight micro fundamentals make shorting metals risky," the note stated.
On precious metals, Goldman has a bullish and bearish scenario. The bank expects gold to rally to $2,250 an ounce if there is a significant recession in the U.S. or fall to $1,500 an ounce if the monetary policy by the Federal Reserve remains on an aggressive tightening path into next year.
Gold is down 9.4% year-to-date, with spot gold last trading at $1,658.10 an ounce.
On silver and platinum, Goldman commented that the global economic outlook needs to improve for the metals to see a solid rebound. "Silver and platinum have underperformed gold this year, and we believe that an improvement in the global industrial cycle is needed for them to reverse this underperformance," the note said.
