EDITOR'S NOTE: There are generally two reasons to buy commodities: to take advantage of longer-term commodity demand across different segments of the global economy and to add another level of diversification (read: another “return source”) to your portfolio. Although the timing of purchases can help, meaning you want to buy when prices are low, in the longer-term scheme of things, timing doesn’t really matter. Remember the saying, “time in the market is much more important than timing the market.” With that said, the mainstream investing herd is generally afraid of catching so-called “falling knives.” That’s how most gold investors missed the 2016 low. But this metaphor is generally applicable to individual stocks, as companies can fail and go bankrupt, but hardly does it ever refer to commodities themselves (unless you’re investing in futures, the “paper” version of a commodity, which is capable of going negative, despite the rarity of such an event). When it comes to hedging paper money with real money, that’s physical gold and silver, timing shouldn’t be a concern unless you’re a short-term speculator. The article you’re about to read describes the more tactical aspects of this “buy commodities now” strategy. While commodities have pulled back from their long-term bull trend, the timing described below is more about the tactical aspects of making a purchase rather than finding a reason to include them in your portfolio.
Sabine Schels, the senior commodities strategist at Goldman Sachs, sees the positive risk reward for commodities at current levels.
Most commodity sectors fell sharply in recent months amid “excessive” recession fears. Goldman’s economists see the market still in a “long late-cycle stage” with Schels noting that “commodities are the best asset to own late cycle.”
Commodities are the best asset to own as demand remains above supply, despite the Fed likely surprising on the hawkish side as it continues to grapple with 40-year high inflation.
“Our strategists are calling for a renewed reduction in risk appetite, we believe the correlation of commodities to other risky assets is set to fall again,” Schels wrote in a client note.
Along these lines, Schels sees a “positive” 12-month forward outlook for commodities, which results in the raised forecast for S&P GSCI and BCOM.
Goldman Sachs sees nearly 40% upside potential in the S&P GSCI, which serves as a benchmark for investment in the commodity markets.
While the Goldman Sachs strategist is “cautious” on the metals in the near term, she argues that Energy and agriculture are likely to lead commodities higher.
“On a relative basis, oil prices now look cheap compared to global gas prices and even thermal coal given the run-up in these markets that oil has completely lacked. With oil the commodity of last resort in an era of severe energy shortages, we believe the pullback in the entire oil complex provides an attractive entry point for long-only investments. Net, we remain very positive on the energy and agriculture sectors despite strong YTD price appreciation,” Schels concluded.
Originally published on Investing.com
