The world economy is set to enter a period of rising inflation and higher growth, prompting the typically bearish US investment bank Goldman Sachs to turn overweight on commodities for next year.
Citing a “cyclically stronger environment” for commodities, Goldman said looming production cuts from Opec, the world’s oil cartel, and a reduction in supply for zinc and natural gas, should help support global commodity prices.
After a sharp climb in the US dollar in the wake of Donald Trump’s election, Goldman said its upbeat outlook on commodities should be able to withstand a stronger greenback.
“Commodity markets are entering a cyclically stronger environment after a mid-cycle pause as evidenced by the recent reacceleration in global Purchasing Managers’ Indices”, said Jeff Currie at the bank. He added that the world’s over-supplied oil markets should also move into deficit again in the second half of next year, on the back of rising demand and cutbacks in production from “high-cost countries in decline”.
This rebalancing should help support calls for a coordinated output cut from Opec, said Mr Currie:
Such a cut will likely help [producers] grow market share by sidelining higher-cost producers – as well as reduce oil price volatility.
Goldman upgraded its three, six and 12-month iron ore prices to $65, $63 and $55 per tonne respectively. It said its Goldman Sachs Return Index is now forecast to return 9 per cent on a three month basis (from -2 per cent), 11 per cent on a six-month basis (from 1.7 per cent) and 6 per cent on a 12-month basis from (8.3 per cent).
Despite warnings that higher inflation could hurt global growth by crimping consumer spending, Goldman argues:
Despite warnings by economists that high oil prices would slow growth, global economy surged ahead even as oil prices climbed above $100/bbl, and despite hopes of a growth tailwind due to lower oil prices since 2014, global growth slowed significantly when prices plunged toward $25/bbl earlier this year.The experience from the 1970s created this deep rooted belief that, when oil prices increased, the wealth transfer from the low-saving developed markets to the high-saving emerging markets would slow growth due to the relatively lower marginal propensity to consume in the emerging markets and do the opposite as oil prices declined.