Goldman has been very bullish on commodities (in addition to the stock market) since the beginning of the year (see their 2010 commodity outlook here) and their current outlook is little changed. In fact, they see the recent sell-off in commodities as an opportunity for investors to jump back in. They see markets ignoring strong fundamental data:
The contrast between increasingly supportive macro fundamentals against escalating policy concerns has perhaps never been as glaring as in the past several days and weeks. Despite a series of remarkably positive global macro data points, heightened concerns about European sovereign solvency, Chinese monetary tightening and US financial reform have dominated the market, leading to a sharp sell-off across commodities, which has erased all year-to-date gains and left several key commodities in negative territory on the year. In fact, the only commodities that have maintained some support have been precious metals, which have benefited from a flight to safety, and livestock, which is more isolated from policy risk.
Although we believe that policy concerns should not be dismissed, we believe that risk/reward is now strongly in favor of long positions, particularly in the context of the improving macro environment. As a result, we would generally view the recent sell-off as a buying opportunity for commodities. We remain most constructive on crude oil, copper and precious metals, with copper in particular looking particularly attractive post the recent severe sell-off.
All in all, Goldman still sees a 12 month total return of almost 18% for the commodity index:
Despite the recent price action, our forecasting model for enhanced S&P GSCI returns is designed to look-through short-term market volatility. As a result, we are maintaining our 12-month returns forecast for the S&P GSCI Enhanced Total Returns Index at 17.6%.
How to play it?
1. Goldman continues to like crude. Currently they like the December WTI contract with a 3 month price target of $96.
We continue to expect improving fundamentals will provide additional support to prices.
2. Buy July 2010 Platinum with
We continue to expect that low real rates and the economic recovery will lend further support to platinum prices.
3. They continue to like gold in the near-term, however, see substantial long-term downside risk:
We expect gold prices to continue to rise from current levels as we expect real interest rates to remain low on a continuation of accommodative US monetary policy. The heightened concerns over European sovereign debt presents upside risk to our current forecasts in the near term. Longer term, however, we continue to see considerable downside risk, should the US Federal Reserve tighten monetary policy earlier than expected.