Commodities are in a 'sweet spot' and prices will keep thriving as the economy picks up, Goldman Sachs says

• Goldman Sachs predicts commodities will keep making gains over the next 12 months.
• The combination of rising inflation levels and loose monetary policy make for an ideal environment, the bank said.
• As commodities have surged in the last year, talk of a supercycle has caught investors' attention.

Commodities will keep thriving over the next twelve months, as the economy picks up and prices will continue to rise as the sector is in a "sweet spot," Goldman Sachs said in a report released late last week.

The current economic environment of globally accelerating growth and the focus on low interest rates by the Federal reserve provide ideal conditions for commodities, according to the report, which was published on Friday.

"This environment is a sweet spot for commodities, as inflation is starting to rise, but monetary policy is not getting tighter for quite some time (we expect a Fed liftoff in 2024), leading to a virtuous cycle of higher commodity prices, stronger EM growth and rising global inflation, reinforcing the same positive feedback loop between commodities and the USD that happened in every other structural bull market, like the 1970s or 2000s," the bank said.

This signals the return of reflationary trading, which occurs when investors buy into assets that they believe will outperform more traditional investments during economic recovery. Reflation is often fueled by factors such as infrastructure spending, or measures to increase consumer spending.

While some commodity prices, such as lumber and copper, have exploded in recent weeks, most gain value in a cyclical way, by moving in between rallies, declines and phases of consolidation, Goldman said. Agriculture and industrial metals are currently leading this next leg of the commodities rally, the bank said.

Bloomberg's commodities index (BCOM TR) has reached record highs this month and is up 17% year to date, the report said. "We believe more is in store and forecast BCOM (S&P GSCI) returns of 6.8% (11.8%) over 12 months," Goldman said, adding the current economic climate is ideal for commodities growth.

Steeper yield curves on 10- or 30-year US bonds are an "overstated" risk, as this tends to add to a favorable environment for cyclical commodities, the bank said. Higher yields on long-term bonds often reflect a belief among investors that inflation will rise and economic growth will accelerate, which in turn contributes to reflationary trading and boosts commodities, the report said.

As individual commodities like copper, lumber and corn have soared in recent months, talk of a new commodities "supercycle" has been rife. Such supercycles are periods of time that often span decades in which commodities trade at a higher level than their long-term valuation is expected to be.

A weaker dollar and economic policies that encourage commodity demand, like infrastructure spending, are common supercycle indicators, Goldman said. But equally, many strategists argue these cyclical price developments and the bull-market environment are normal, and are not necessarily symptomatic of a supercycle.