The rally of commodity prices might not be seen this time around, Goldman Sachs said in a note, even as the lending and investor bank noted that such prices usually rally as the U.S. Federal Reserve heads into a hiking cycle.
Historically, "commodities perform the best when the Fed is raising rates," Goldman said. "This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating. Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best."
While noting the mainland's "outsized role" in demand, rising interest rates in Chia also tend to coincide with better commodities performance, it added.
And as the Fed raises rates and the labor market runs at full employment and with expectations for solid performance over the coming year that's a driver of Goldman's overweight call on commodities.
But three risks that could derail its view were pointed out by Goldman.
Firstly, "a profound impact" on commodity returns could be inflicted by the technology changes and U.S. shale oil production, it noted.
"While conventional oil production takes time to ramp up, the response time for shale is much shorter," it said. "This has increased the oil supply elasticity, which may contribute to lower commodities returns relative to historical experience even as demand strengthens."
Secondly, China tailwind may be waning, said Goldman.
An example cited by the bank was the stupendous rise in demand for Copper in China which saw a total of 90 percent of the total global growth in copper demand coming from the second largest economy in the world as demand for the metal rose from just 660,000 tons in 1990 to reach an astounding 10.2 million tons in 2015.
"Going forward, the growth in the Chinese demand for industrial metals is likely to be much more muted, also contributing to lower commodities returns relative to historical experience," Goldman said.
While noting that even amid a gradual U.S. and global economic recovery, the current pace has been much slower compared with previous cycles for the Fed's hiking cycle, which was identified by the bank as being the final risk for the commodities market.
"While our U.S. economists expect three hikes this year and another four hikes in 2018, the fact that this hiking cycle has been different from previous hiking cycles imply that commodities returns may also differ from their historical performance," it said.
(Source:www.cnbc.com)
Historically, "commodities perform the best when the Fed is raising rates," Goldman said. "This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating. Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best."
While noting the mainland's "outsized role" in demand, rising interest rates in Chia also tend to coincide with better commodities performance, it added.
And as the Fed raises rates and the labor market runs at full employment and with expectations for solid performance over the coming year that's a driver of Goldman's overweight call on commodities.
But three risks that could derail its view were pointed out by Goldman.
Firstly, "a profound impact" on commodity returns could be inflicted by the technology changes and U.S. shale oil production, it noted.
"While conventional oil production takes time to ramp up, the response time for shale is much shorter," it said. "This has increased the oil supply elasticity, which may contribute to lower commodities returns relative to historical experience even as demand strengthens."
Secondly, China tailwind may be waning, said Goldman.
An example cited by the bank was the stupendous rise in demand for Copper in China which saw a total of 90 percent of the total global growth in copper demand coming from the second largest economy in the world as demand for the metal rose from just 660,000 tons in 1990 to reach an astounding 10.2 million tons in 2015.
"Going forward, the growth in the Chinese demand for industrial metals is likely to be much more muted, also contributing to lower commodities returns relative to historical experience," Goldman said.
While noting that even amid a gradual U.S. and global economic recovery, the current pace has been much slower compared with previous cycles for the Fed's hiking cycle, which was identified by the bank as being the final risk for the commodities market.
"While our U.S. economists expect three hikes this year and another four hikes in 2018, the fact that this hiking cycle has been different from previous hiking cycles imply that commodities returns may also differ from their historical performance," it said.
(Source:www.cnbc.com)