The analysis team at Goldman Sachs suggests that while the recent sell-offs may raise some doubts that we are heading back into a regime of high commodity volatility, with little diversification benefits, the numbers do not bear this out.
Key Quotes
“Both cross-commodity and cross-asset (commodities vs. equities, bonds or FX) correlations remain comparable with those seen in the 1990s/early-2000s.”
“We believe this is a direct result of reduced uncertainty around long-term prices, due to increased confidence in resource bases. In the past, oil supply uncertainty was a question of which technology would be used to create the marginal barrel. Now, the only remaining uncertainty is the exact cost of shale extraction, giving a much narrower range of long-term price forecasts. This certainty around long-term prices also greatly increases the likelihood that sovereign oil producers will hit their budget targets, reducing the need to save or borrow US Dollars. Less excess savings or borrowings put less oil-correlated price pressures on the Dollar, US rates and Dollar-denominated credit, reducing cross-commodity and cross-asset correlations.”
“As long-term supply certainty stabilizes long-term prices, demand is left as the primary focus for the market. As already noted, once the level of demand begins to exceed the level of supply, we start to see sustained periods of backwardation (positive carry) emerging. As a result, we maintain our overweight recommendation on commodities, with a 12-month-ahead forecast for the enhanced S&P GSCI at +9%, with roll yield (backwardation) accounting for around half of this return.”
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