Goldman Sachs is predicting a bull market on gold and other commodities in 2021 based on forecasts for a weaker dollar, rising inflation and the additional economic and fiscal stimulus.
Last week, analysts from the Wall Street bank predicted a 12-month return of 30% on the S&P’s Goldman Sachs Commodities Index with a 42.6% return for energy, 17.9% for precious metals, 5.5% for industrial metals and a negative return of 0.8% for agriculture. It’s recommending long positions on gold, silver, copper, US gas, Brent crude oil and jet regrade.
The bank is predicting that non-energy commodities like agriculture and metals will have “more near-term upside than oil, with smaller inventories to move through before prices begin to rise”. The Chinese economic rebound has pushed the demand for metals to its highest level since 2011 and is expected to continue doing so in 2021.
Markets are now increasingly concerned about the return of inflation as a result of historic high on fiscal spending and low interest rates. The Wall Street bank predicts this will drive further the investment in commodities as a strategy to hedge this tail risk.
Gold is widely viewed as a hedge against inflation and currency debasement. So it’s been no surprise that the events of 2020 and the subsequent unprecedented global stimulus and close to zero interest rates have pushed its price by 26% this year. Goldman forecasts that its value will continue to grow in the next twelve months from $1,836 per ounce on average in 2021 to $2,300 per ounce in 2021.
The weakening of the dollar is also expected to drive commodities, making them more expensive as a result of the falling price of the dollar. The US dollar index has decreased by around 3.07% in 2020 and is expected to continue on this trend. Stephen Roach, a former chairman of Morgan Stanley predicts a dramatic decline of 35% by the end of 2021, though his pessimistic projection has been deemed controversial.
The outcome of the presidential elections
A Joe Biden administration will not derail Goldman’s bullish forecast. The bank has previously suggested that a “Blue Wave” would be a positive catalyst for energy prices due to Democrats’ plans to increase taxes and regulation on the sector. US gasoline demand could increase by 150,000 barrels per day in 2021 compared to its current base case.
The bank maintained a “neutral” view on commodities in the near term and “overweight” in the medium term.