The basis for Goldman Sachs’ bullish view comes down to three price drivers. The extent to which investors weight those outcomes will determine the pace of price rises and markets’ supply-demand expectations by anything from 3-30 months.
There has been stock market pullback this week in the face of rising anxiety over the spread of the COVID-19 pandemic. However, Goldman see this as a temporary setback that will likely wane as the year draws to a close.
The first driver, BusinessInsider noted, is investors pivoting from older polluting areas of the economy towards tech. The huge outperformance of technology stocks over traditional businesses this year illustrates that trend.
This is and will continue to build up cumulative under-investment in what BusinessInsider terms the “old economy” sectors. As a result, businesses in those sector will have too much debt, too much capacity and high emissions.
A focus on rectifying these issues will lead to structural under-investment in new facilities and degradation in the new supply pipeline going forward.
Presidential scenarios
A Trump victory would see a renewed focus on tax reduction and stimulus. Meanwhile, a Biden victory is expected by Goldman to produce a “blue wave” stimulus package. Of course, such a wave assumes he can carry both houses of Congress.
Goldman estimates U.S. industrial production would grow under that scenario by 4-5% by 2024. That type of growth implies strong increases in the consumption of natural gas, crude oil, gasoline and bulk commodities.
Yet the prospects for fossil fuel price rises are potentially higher under a Biden win. Stimulus would go hand in hand with increased oversight of shale drilling, likely inhibiting investment and/or raising break-even costs.
Rising demand would therefore hit a more constrained supply and result in rising prices. Even without a landslide Biden win, increased consumer-focused stimulus in the U.S., Europe, and China is forecast to reach $1 trillion over 2021-25.
At the same time, the U.S. Federal Reserve’s commitment to keeping interest rates close to zero for the next couple of years is likely to result in prolonged weakness in the dollar, which tends to favor commodity prices.
A sustained increase in input prices will eventually lead to a pickup in inflation, the bank believes. Investors in precious metals do, too, with gold up 26% already this year. Furthermore, in Goldman’s opinion it has further to go.
In fact, rising anxiety over inflation will lead to a rotation into commodities, the report suggests.
However, the main beneficiaries are likely to be precious metals rather than base metals.
Metals impacts
Goldman estimates a Biden win would increase U.S. copper demand by 2% over the next five years. In addition, it predicted copper prices, which have fallen back to $6,800 on a general metals pullback this week, to be at $7,000 in three months. Furthermore, it predicts copper to hit $7,250 in six months and $7,500 by this time next year.
Precious metals are one of the biggest beneficiaries, the bank suggests. Gold is used as both a hedge against the loss of purchasing power of a weaker dollar and for pullbacks in equity portfolios, the note said. The note continues, adding with gold currently in the low $1,900s per ounce, it could be at $2,300 per ounce next year.
Silver, too, might benefit both from inflation anxiety and a rebound in industrial demand. The precious metal could hit $30 per ounce next year from a current level of around $25 now.
Potentially the largest beneficiary is the one that has fallen the furthest and whose prospects looked so bleak earlier this year. Predicated on a rebound in gasoline demand and constrained shale supply, U.S. oil prices could rise to $65 per barrel late next year, the bank’s report predicts. Such a rise would impact logistics costs for those budgeting for 2021.
Not all analysts are as anxious about inflation. Goldman’s analysis of supply fundamentals and probable demand appears to be broadly accepted. However, views are mixed about when our decadelong low-inflation environment will end.
Of the many moving pieces on the board, the trajectory and velocity of inflation seem the most uncertain.
By Stuart Burns
Source: Agmetalminer
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