Goldman is bullish on commodities.

In itself, that’s not exactly news. Goldman is perennially constructive on commodities. But, in the context of 2024 macro outlooks which continue to flood in, it’s worth a mention.

For me, the bank’s view is confirmation bias. For a variety of reasons, not least of which are geopolitical tensions and friction around the energy transition (I think it’s too late for clean energy, I think episodic bouts of extreme volatility are likely for fossil fuels and I think that even if the energy transition turns out to be doable, it’ll be extraordinarily extractive and highly commodities-intensive) a modest commodities overweight makes all the sense in the world in my opinion. If nothing else, it’s a hedge.

In an outlook piece dated November 12, Goldman recommended a commodities long for the upcoming year, predicting 21% total returns over 12 months (10% from spot, 4% from roll, 5% from collateral returns). The figures below are a good summary snapshot.

“We expect oil, oil products and several industrial metals to best leverage cyclical and structural support to generate returns in 2024 [and] recommend a ‘2024 Deficits’ basket, defined as going long the GSCI Energy Index excluding US natural gas (we forecast a 34% 12M return) and long the GSCI Metals Index excluding nickel and zinc (25% 12M return),” analysts including Samantha Dart and Daan Struyven wrote.

There are three main reasons for Goldman’s long commodities call for 2024. The full note is nearly two-dozen pages. As with every other Wall Street year-ahead outlook, it’s not amenable to any sort of summary treatment. However, Goldman does a better job than most banks of structuring their pieces such that investors can actually read them.

In the commodities piece, the bank summarized the reasons for the bullish commodities outlook as follows:

• Reason 1: Cyclical Support: Monetary Policy Drag and Recession Fears Fade; Manufacturing Initiates a Recovery; Resilient Services. Following the latest oil selloff, the GSCI total return index is roughly flat YTD, on concerns about demand from rate hikes, some renewed recession fears, manufacturing destocking and on oil supply beats. We, however, believe that a fading monetary policy drag, receding recession fears, reduced industrial destocking and ongoing resilience in services activity will support commodities demand, and spot prices.
• Reason 2: Structural Support from OPEC Carry, Refining Tightness, and Green Metals Demand. In addition to cyclical support from above-consensus global GDP growth and a nascent recovery in manufacturing, we also expect structural support to commodity returns from OPEC-driven carry, refinery tightness and strong green metals demand.
• Reason 3: Hedging Value. On top of cyclical and structural support to our baseline commodity returns, energy and gold can also be an effective hedge against negative supply shocks, from geopolitical or other developments, in scenarios where other assets (especially risk assets) suffer from lower growth.

I should emphasize: Those bullet points don’t even begin to cover it. Goldman went into laborious detail while elaborating on each of those three talking points. I’m sure the reasoning behind the reasons (if you will) is highly relevant for some investor cohorts. But for general purposes, the broad strokes/CliffsNotes version is more than sufficient.

Goldman mentioned one upside risk and two downside scenarios. “Supply disruptions, a colder winter and reduced conservation efforts are key upside risks to our forecast of flat winter European gas prices,” the bank said.

On the downside, subdued manufacturing activity around the world might continue in the event of a moribund goods economy in 2024. “The other main risk to our view is that oil supply surprises to the upside, for instance because of higher-than-expected price elasticity or lower OPEC cohesion,” Goldman added. “As price levels remain quite high heading into the US election campaign, supply from countries under international scrutiny such as Iran and Venezuela may surprise to the upside, although we believe that underinvestment limits volume upside.”