Jeffrey Currie, head of commodities research at (Goldman Sachs) at Goldman Sachs, said on Monday that with rising geopolitical risks, this reinforced his argument that demand for commodities had never been stronger.
And while many commodities will be fundamentally affected by the Russia-Ukraine incident, Goldman Sachs is particularly bullish on crude oil and gold, which it believes can provide the purest hedge against this geopolitical risk.
First of all, there is a clear upward trend in oil prices, both tactically and strategically. Goldman Sachs said the risk premium posed by the current geopolitical situation came almost against the backdrop of the most tight inventory levels, low spare capacity and less flexible shale oil and gas industry in decades.
Goldman's model shows that if the oil market is forced to balance by 2022-a year earlier than its basic scenario assumption of $105 a barrel, oil prices will have to reach $125 a barrel to fully balance supply and demand by undermining demand. In Goldman's view, the key to easing oil price bullish sentiment is to reach an Iran nuclear deal, but there are still many obstacles to achieving this geopolitical goal.
It is worth mentioning that Goldman Sachs strategists have devoted more space to gold in their latest report than the current oil price, which is almost unanimously favored by the industry.
Gold is expected to break free from the shackles of real interest rates.
"with rising tensions in Russia and Ukraine, it is clear that gold will be the currency of last resort," Currie said. As we mentioned earlier, gold tends to respond to geopolitical risks that directly affect the US. We believe that the continuing energy crisis and US inflation above the [Fed] target mean that any disruption in commodity flows from Russia could lead to greater concerns about high inflation in the US, leading to a hard landing for the economy. "
Before that, a widespread concern about gold prices this year was that the Fed would raise interest rates and that long-term real interest rates could rise.
However, Goldman Sachs has found that historically, gold tends to rise during interest rate hikes, when the negative correlation between gold and long-term real interest rates is often broken. This has already happened-gold prices have shown resilience at the same time as the recent rise in 10-year real yields in the US.
In previous research, Goldman Sachs linked the phenomenon to the fact that higher interest rates themselves could lead to concerns about slower growth and recession, boosting demand for safe-haven assets such as gold. It also means that if persistently high inflation shows no sign of slowing in the second half of 2022, forcing the Fed to raise interest rates more aggressively than expected, gold should remain resilient at this stage because it will heighten fears of a potential recession.
"compared with the 2017-18 rate-raising cycle, the Fed's rate-raising cycle this year seems to be more similar to that of 2004-06, as our economists expect a substantial slowdown in US economic growth," Goldman Sachs said. our forecasts for emerging market growth in dollar terms are not as strong as in 2004-06, but at least positive rather than negative as in 2018. "
The best choice under the geopolitical crisis of "beauty"?
Although there are still many questions about the effectiveness of gold as a geopolitical hedging tool amid recent geopolitical tensions in Eastern Europe, Currie and his team believe that gold will be the ultimate hedge in a geopolitical crisis.
In previous research, Goldman Sachs found that the response of gold prices to geopolitical shocks varied significantly-gold prices rose strongly after 9 / 11 and the Gulf War in 2003, while there was little response when events broke out in Russia and Ukraine in 2014.
In response, Goldman Sachs concluded that geopolitical events in which the United States is directly involved tend to have a greater positive impact on gold.
This may be because the dollar itself often acts as a safe haven when tensions arise in other parts of the world. But when the US itself is affected, investors use gold as a last resort. Crucially, Goldman Sachs believes that the continuing energy crisis and higher-than-target US inflation mean that any disruption in commodity flows from Russia could lead to greater concerns about excessive US inflation, leading to a hard landing. Therefore, it will directly affect the United States.
As for the comparison between gold and bitcoin, Goldman Sachs believes that gold is more like an inflation hedge in risk-off, while Bitcoin is an inflation hedge in risk-on. Now, market risk sentiment has begun to deteriorate, and Goldman Sachs portfolio strategists believe that the challenging combination of economic growth and inflation will keep market volatility high in the short term.
To sum up, in its latest report, Goldman Sachs raised its forecast for gold prices in the coming year and put forward trading recommendations for long gold.
Goldman Sachs points out that the two most important drivers of gold prices are "fear" (investment demand) and "wealth" (emerging market purchasing power). Based on expectations of a slowdown in the US economy and heightened fears of a recession, the annual increase in gold ETF holdings should rise to 300T by the end of 2022, and emerging markets' nominal GDP in dollar terms is expected to grow by 10 per cent, which means gold prices will reach $2150 an ounce in 12 months. Goldman Sachs also recommends long Comex gold futures in December 2022.
In terms of forecasts for a shorter time period, Goldman Sachs raised its forecast for gold prices over the next six months to $2050 / oz, although it also cut its forecast for gold prices over the next three months to $1950 / oz from $2000 / oz.
