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Goldman Sachs Say Oil and Gold Best Geopolitical Diversifiers

COMMODITIES
  • While many commodities are fundamentally exposed to events in the Ukraine, GS believe oil and gold provide the cleanest hedges for this geopolitical risk.
  • There is clear upside skew in oil prices on both a tactical and strategic basis, with any geopolitical risk premia coming in on top of the tightest inventory levels in decades, low spare capacity and a much less elastic shale sector. If the oil market is forced into balancing itself by 2022 – a year sooner than their base case of $105/bbl prices- modelling suggests the oil price will have to hit $125/bbl to balance almost entirely through demand destruction.
    • Key point of relief to such a bullish set up in oil would be an Iran deal; however, the geopolitical hurdles to this appear to be stubbornly high.
  • In the same vein, it is clear that as tension in the region increases, gold is acting as the currency of last resort. GS noted that gold tends to respond to those geopolitical risks which can directly affect the US. GS believe that the ongoing energy crisis and above target US inflation means that any disruption to commodity flows from Russia can lead to greater concern of US inflation overshoot and subsequent hard landing.
  • Goldman Sachs reiterate their view of the advantages of adding commodities to a portfolio in the current environment. From a strategic case perspective, not only are commodities a geopolitical hedge, they are also an inflation hedge, and a hedge against valuation risk from shifting central banks reaction function. Not only have returns been significantly positive for nearly two years now, with their returns forecast of 15% this year making commodities their top asset class recommendation, the diversification argument has rarely been stronger with commodities up 14% ytd and equities down 8%.
Energy BulletsCommodities
Energy BulletsCommodities

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