Goldman Sachs, the standard-bearer of commodities, continues to be bullish on commodities.
In recent days, rising geopolitical tensions over Ukraine have further pushed up commodity prices.
Goldman Sachs believes that inventories in almost all major commodity markets are now in a state of severe depletion. In this state, even the smallest impact on the supply side, or even a few days of disruption, will be very vulnerable.
In addition, each market shock increases the possibility of a disruption, while inventory shortages have a knock-on effect similar to "dominoes".
Goldman Sachs points out that with the rise in geopolitical risk, the outlook for commodities has never been stronger.
Oil and gold are the best hedging assets
While many commodities are fundamentally affected by events in Ukraine, Goldman Sachs believes that oil and gold provide the most effective hedge against this geopolitical risk.
First, there is a clear upward trend in oil prices, both tactically and strategically, with geopolitical risk premiums higher than when inventory levels have been tighter in decades and lower spare capacity. The flexibility of the shale oil and gas industry is also greatly reduced.
Goldman Sachs points out that if oil prices hit a high of $105 a barrel ahead of schedule by 2022 and the oil market is forced to balance, oil prices will have to rise until they reach $125 a barrel before a full balance can be achieved by disrupting demand.
According to Goldman Sachs, the key to easing this bullish oil price is the Iran nuclear deal. However, the geopolitical obstacles to achieving this goal seem insurmountable. Similarly, as tensions rise in Ukraine, gold is acting as the currency of last resort.
As Goldman Sachs mentioned earlier, gold tends to respond to geopolitical risks that directly affect the US. The continuing energy crisis and above-target inflation in the US mean that any disruption in the flow of goods from Russia could lead to more fears that US inflation is too high, leading the government to force inflation to cool the economy into recession.
Goldman reiterated that in the current environment, adding commodities to the portfolio is beneficial.
From a strategic point of view, commodities are not only a hedge against geopolitical risk, but also a hedge against inflation, as well as against the valuation risk brought about by a shift in the central bank's response function. Over the past two years, not only have commodity returns been noticeably positive, but Goldman Sachs has forecast a return of 15 per cent this year, making commodities the most recommended asset class.
From a tactical point of view, despite a strong start to a strong start to commodities up more than 14 per cent since 2022, the current global economic environment is as optimistic as it was during the recovery. But America's M2 is still growing at an annual rate of 13.5%, oil demand is at an all-time high, and Europe's fiscal recovery fund has not been put into use until now.
Goldman has been a big believer in holding commodities since May 2020 as downside risks to the dollar have increased.
Natural gas and aluminum are also less affected by Ukrainian risks.
In addition to oil and gold as the best hedge against geopolitical risks, Goldman Sachs has noted that natural gas and aluminium prices have risen the most in recent months because of rising tensions in Ukraine.
As a result, Goldman Sachs believes that while European TTF gas and aluminium prices face short-term price risks in the face of further tensions, their market fundamentals have become more immune to such disruptions in recent weeks.
Demand has fallen over the past few weeks due to warmer weather and strong wind power, as more and more liquefied natural gas arrives. As a result, Goldman Sachs believes that TTF's inventory is cushioned enough to withstand temporary supply disruptions when Russia flows through Ukraine.
In addition, the fundamentals of aluminium are less affected by such physical supply disruptions than in the fourth quarter of 2021. The most affected smelters in Europe have been closed and many are likely to remain closed for the rest of the year. Since there is only one alumina smelter in Ukraine, which itself is a key part of Russian aluminum production, Goldman Sachs believes that aluminum production currently faces little operational risk.
But the risks remain. Goldman Sachs pointed out that any delay in the approval of Nord Stream 2, a new Russian-German gas pipeline, would substantially disrupt Europe's summer gas supply and demand balance.
