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- Goldman Sachs' commodity strategists are once again reiterating their bullish call on commodities.
- "The strategic case for owning commodities has rarely been stronger," Jeffrey Currie, Goldman's head of global commodity research, said in a note on Tuesday.
Goldman Sachs is doubling down on its bullish bet on commodities.
The firm's commodity strategists reiterated their call in early February, just before the stock market got rocked by concerns about inflation and higher interest rates.
But that's exactly the kind of environment that would help commodities outperform other asset classes, Goldman Sachs and strategists at other firms have argued. Their call has been prescient: commodities are the best-performing asset class year-to-date, and have outperformed the stock market by 8%.
"As we have argued since going overweight in 2016, the strategic case for owning commodities has rarely been stronger," Jeffrey Currie, Goldman's head of global commodity research, said in a note on Tuesday. "Strong global economic growth that is late cycle in the developed markets with room to run in the emerging markets supports demand growth that is depleting global supply chains."
Many investors remain skeptical, Currie said, scared away by the weak returns from US energy producers over the past decade, and concerns that the Organisation of Petroleum Exporting Countries and Russia are artificially lifting oil prices by limiting supply.
But skeptical investors don't only have themselves to blame. They could also point to the length of this recovery, which has delayed what's historically the strongest period for commodity returns, according to Currie. Returns are typically very weak during the early phases of the cycle - the contraction and recovery - which lasted for a decade from December 2007, he said. That's because of weak demand pared with excess production.
"Commodities can post very large negative and weak returns during the recession/recovery phase, but massively outperform equities in the expansion/slowdown phase of the business cycle," Currie said.
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It may be counterintuitive to recommend commodities just as economic growth starts to show signs of slowing. However, Currie says, commodity prices are determined by relationship between demand and supply. And so even if demand growth slows, prices can rally if the level of demand remains above supply.
The current prices of commodities relative to their futures contracts indicates that this is already the case for many commodities. For example, oil has entered into backwardation, meaning that spot prices are higher than prices for futures contracts. Currie counted 13 out of 24 commodities in backwardation.
Currie described this state as a "scarcity premium."
"Think of oxygen: if it became scarce we would pay an enormous premium today for it as we don't need it tomorrow if we don't have it today," he said.
"Financial markets cannot possess this characteristic which is why gold cannot go backwardated since it is not consumed like oxygen, energy or grains. But it is this scarcity premium that creates the late-cycle diversification benefits of commodities, particularly in relation to inflation."
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