Goldman Sachs predicts commodity prices to rise 15% in 2012

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

In a Dec. 1 report on the current 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 global recession, Goldman Sachs says commodity markets should trend positively and are unlikely to be severely impacted.

Led by London-based Jeffrey Currie, 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 seen in 2008, the report notes, when the United States was in recession but commodity markets traded higher because emerging markets remained strong — that is, until financial stress ultimately overwhelmed them all and created a global recession.

Although Goldman Sachs’ economists predict 4.1% global GDP growth in 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 manage to navigate a central course between the whirlpool of world economic recession on one side and the rocks of 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 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.

Individual commodity predictions

Goldman Sachs’ current trading recommendations for commodities in the report include: long gold, long Brent Crude Oil, long copper, long zinc and long UK natural gas.

Gold: The yellow metal has been a winner for Goldman Sachs in the past, and the esteemed investment bank expects gold prices to continue to climb over the next 12 months given the current low level of U.S. real interest rates. “With our U.S. economics team forecasting slower U.S. economic growth throughout 2012, 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’ continues to expect that oil demand will grow well in excess of production capacity growth. “In our view, it is only a matter of time before inventories and OPEC 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 continue to overhang the market. However, “Looking ahead, we continue to emphasize that the main-line expectation of lackluster but substantially positive global economic growth led by EM and disappointing supply growth in key metals, points to higher metals prices in 2012. Further, we maintain that a powerful upside catalyst still lies largely ahead in China should the ongoing easing policy shift and/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 around US$4.25 per lb., up from the current spot price of approximately US$7,500 per tonne, or around 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 in 2013-15.”

Silver: The report is skimpy on 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 currently 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 recovers through 2012, we expect high cost nickel pig iron will still be needed to clear the market.” Nickel’s 12-month price target is US$21,000 per tonne.

Contrasting views

Not ever heavyweight investment bank seems to share Goldman Sachs’ bullishness on commodities over the next year. On Nov. 22, JPMorgan Chase cut commodities to ‘underweight’ citing policy failures in the U.S. and the continuing European debt saga. A Nov. 30 report by Morgan Stanley 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. Lastly, data released on Dec. 1 showed manufacturing in China, the largest consumer of energy and base metals, declined for the first time since the 2008-2009 recession.