Commodities have been on the longest losing streak in more than three years with the Bloomberg Commodity Index, which measures returns on 22 raw materials, plunging 8% from a year-to-date look. This is especially thanks to a strong dollar, trade frictions and concerns over China’s demand outlook. Additionally, weakening economic growth in many parts of the world dampened the appeal for commodities.
Notably, a high dollar made dollar-denominated assets expensive for foreign investors, potentially diminishing demand for commodities.
Oil price has collapsed in recent months owing to oversupply concerns and waning global demand while metals tumbled amid worries of a hard landing in China and slowing global economic growth. The ongoing trade war between the world’s two largest economies has sparked fears of a global slowdown.
Given the beaten down prices, New York-based research firm Goldman Sachs (GS – Free Report) believes commodities offer an extremely attractive entry point for longs in oil, gold, and metals. The analyst expects commodities to surge around 17% over the coming months, with this week’s G-20 meeting in Buenos Aires cited as a potential turning point for raw materials. It believes that “many of the political uncertainties weighing on commodity markets have a significant chance of being addressed in the G20 meeting. This includes some improvement on the China-U.S. relationship and, like in the 2016 G-20 meetings, some greater clarity on a potential OPEC cut”.
Per the analyst Jeffrey Currie, an OPEC supply cut and its announcement will lead to a recovery in oil prices. As such, Currie advises going long on short-dated Brent. Additionally, the oil market will likely return to a state of backwardation (the front-month contract is higher than the next-month contract), which is a positive for oil futures.
Meanwhile, the firm predicts gold prices climbing in 2019 given that the market has priced in 10 of the 12 Fed rate hikes and that the strong dollar trend is reversing. If growth in the United States slows down next year as expected, gold would benefit from higher demand for defensive assets.