Commodity prices have recently mirrored the fluctuations in the market's expectations of Federal Reserve rate cuts, Goldman Sachs commodity strategists noted on Tuesday.
Looking ahead, the strategists expect the commodity market to receive a boost from lower interest rates, “driven by an easier Fed stance (rather than by lower GDP growth),” they wrote.
“The positive impact of lower interest rates on both commodity demand and supply makes the commodity price impact ambiguous in theory,” strategists said.
“In practice, we find that the demand boost to prices from a lower cost of carrying inventory and from higher GDP via easier financial conditions dominates,” they added.
The most significant impact of the Fed’s policy easing is expected to be on prices of industrial metals, notably copper, and gold, with cyclical oil products and crude oil also benefiting, albeit to a lesser extent.
Conversely, Goldman’s findings revealed that natural gas and agricultural commodities do not show any meaningful price response to changes in interest rates. This is attributed to micro factors, such as seasonal inventory cycles and weather conditions, playing a more dominant role.
Importantly, the strategists stressed that the effect of rate cuts on the prices of oil and industrial metals does not become fully apparent immediately, reinforcing their longstanding perspective that oil primarily behaves as a spot asset.
“We estimate that the boost to oil prices from a 100bp policy-induced drop in US 2-year yields triples from 3% on the Fed meeting day to 9% after 1-2 years,” the strategists said.
Overall, Goldman's analysis underpins their cautiously optimistic stance on commodities.
In the broker’s “soft landing” scenario where the Fed reduces interest rates amidst slowing core inflation and stable growth, they foresee industrial metals, particularly copper, yielding attractive returns.
On the other hand, Goldman’s “no landing scenario” highlights potential value in oil and oil products as an inflation hedge in stable economic conditions, and in oil and gold as safeguards against geopolitical disruptions in case of a potential hard landing.