Goldman Sachs: Commodity prices up 15% next year

Analysts from Goldman Sachs (GS-N) have forecast that commodity prices will increase by 15% in 2012, with the influential investment bank maintaining an “overweight” recommendation on commodities for the coming 12 months. 

In a Dec. 1 report on the outlook for commodities, Goldman Sachs concedes the European debt crisis remains a significant downside risk in 2012. 

However, as long as the downward pressures result in economic weakness and not in dire financial stress that would likely precipitate a worldwide recession, Goldman Sachs says commodity markets should trend positively and are unlikely to be severely impacted by such negative developments. 

Headed by London-based Jeffrey Currie, the head of Global Commodities Research at Goldman Sachs, the group of analysts point toward the month of November as a fitting example. While the European debt crisis intensified during the month, unlike other financial markets, commodity markets traded mostly sideways and ended the month up 1%. 

This was also the pattern exhibited in 2008, the report noted, when the U.S. was in recession but commodity markets traded higher because emerging markets remained strong – until financial stress became overwhelming and created a global recession.

Although Goldman Sachs’ economists predict 4.1% global gross domestic product (GDP) growth for 2013, they have reduced their global GDP forecast for 2012 to 3.2% from 3.4%. The reduced outlook but avoidance of global recession points to Goldman Sachs’ belief that the commodity markets will navigate a course between a world economic recession on one side, and potential supply shortages on the other. 

Nevertheless, the downside risks for 2013 remain onerous. Over the next 12 months, “increasingly tighter physical markets driven by de-stocking and supply disappointments create significant upside price risks in 2012 that could threaten economic growth,” Goldman Sachs warns.

The investment bank goes on to note that if either of these risks – an oil price spike or a global economic recession triggered by the European debt crisis – are realized in 2012, they would likely lead to lower commodity demand in 2012, thereby increasing downside risk for 2013 and beyond.

Price predictions

Goldman Sachs’ trading recommendations for commodities in the report include: long gold, long Brent crude oil, long copper, long zinc and long U.K. natural gas.

Gold: The yellow metal has been a winner for Goldman Sachs in the past, and the investment bank foresees climbing gold prices over the next 12 months given the low level of U.S. real interest rates. “With our U.S. economics team forecasting slower U.S. economic growth throughout next year,” the report reads, “we expect U.S. real interest rates to remain lower for longer, supporting higher gold prices.”

The report recommends near-dated consumer hedges in gold through 2012, and has a 12-month price target of US$1,940 per oz., up from US$1,713 per oz. on Nov. 29.

Petroleum: Goldman Sachs expects that oil demand will grow in excess of production capacity growth. “In our view, it is only a matter of time before inventories and the Organization of the Petroleum Exporting Countries’ spare capacity become effectively exhausted, requiring higher oil prices to restrain demand . . . further, we believe that the oil market has been too focused on the downside risks to prices and not focused enough on the upside risk, should the economy avoid recession.” 

The report gives an end-of-2012 price forecast for Brent crude oil of US$127.50 per barrel, and an end-of-2013 forecast of US$135 per barrel. 

Copper: Sovereign debt concerns and slowing economic growth have kept base-metal prices under pressure, Goldman Sachs says. In the near-term, these concerns will likely overhang the market. 

However, “looking ahead, we continue to emphasize that the main-line expectation of lacklustre but substantially positive global economic growth led by E and M [copper products], and disappointing supply growth in key metals points to higher metals prices next year. Further, we maintain that a powerful upside catalyst lies ahead in China should the ongoing easing policy shift, or lower prices increasingly drive strong Chinese consumption growth.” 

The report forecasts a 12-month copper price target of US$9,500 per tonne, or US$4.25 per lb., up from the spot price of US$7,500 per tonne, or US$3.50 per lb.

Zinc: Goldman Sachs is long on zinc with a US$2,400-per-tonne, 12-month price target. As with copper, the investment bank warns zinc prices may continue to dip in the near-term, however it says they are still low enough to motivate reduced production in coming months.

“Medium-term, we continue to expect zinc to become more supply constrained owing to growing demand from China, as well as important mine closures that are set to take place from 2013 to 2015.”

Silver: The report is doesn’t offer much in terms of predictions for silver, simply saying silver prices tend to track gold prices and will reflect the historical ratio. At US$32.40 per oz., however, Goldman Sachs’ 12-month price target suggests silver is overvalued compared with gold. On Dec. 1, the spot price for silver in New York was US$32.87.

Nickel: “Nickel underperformed in November, with stocks rising over the month. We continue to expect a small nickel surplus in 2012 as new production comes online. As both demand and sentiment towards demand recover through 2012, we expect high-cost nickel pig iron will still be needed to clear the market.” The report’s 12-month price target for nickel is US$21,000 per tonne. 

Contrasting views

Not every heavyweight investment bank seems to share Goldman Sachs’ bullishness on commodities over the next year.

On Nov. 22, JPMorgan Chase & Co. (JPM-N) cut commodities to “underweight,” citing policy failures in the U.S. and the European debt saga. 

A Nov. 30 report by Morgan Stanley (MS-N) similarly predicted limited potential for gains in commodities throughout 2012, arguing the global economy will slow and risk aversion will boost the greenback, placing additional downward pressure on commodity prices. 

Data released on Dec. 1 showed that manufacturing in China, the world’s largest consumer of energy and base metals, declined for the first time since the 2008-2009 recession.