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Société Générale Advises Investors To Maximize Their Commodity Exposure

Derek Wolfe

Updated: April 11, 2022

maximize commodity exposure
Editor’s Note:

EDITOR'S NOTE: If commodities have been rising considerably over the last few years with gold being among those leading the pack in the surge, then what is Societe Generale forecasting with regard to the global economy when issuing an opinion to maximize commodity exposure? Surely, we’d interpret its guidance to mean that today’s commodity highs aren’t really all that high; that fundamental and geopolitical factors are redefining the range. It’s interesting to see what they have in their portfolio and how they’re strategically timing their holdings, particularly with regard to the yellow metal. And in stark contrast to other analysts and banks, they disagree with the recession and stagflation calls which seem to be getting louder as new economic data pour in. So, is Societe Generale outlining a near-term risk and longer-term growth scenario? Check it out for yourself. It’s always interesting to see when the difference between big banks’ opinions contrasts like night and day. And it’s important to see what rationale is driving whatever forecast they’re willing to risk. 

(Kitco News) - The Federal Reserve is embarking on an aggressive monetary policy tightening cycle and one international bank is advising investors to maximize their commodity exposure, including exposure to gold.

In a report published by Société Générale, the bank said it currently holds a maximum allocation of 5% of gold in its Multi-Asset Portfolio, representing half of its commodity exposure. The comment comes as gold prices continue to consolidate between $1,900 and $1,950 an ounce; however, SocGen analysts expect to see a break out to the upside within the next three months.

“High inflation and lower rates suggest that gold will hit record highs. Indeed, we expect gold to reach $2,200/oz in2Q,” the analysts said.

Looking at the other half of its commodity exposure, SocGen analysts said they prefer rotating out of the energy sector and into base metals like copper. The bank also likes silver as an industrial metal.

“To protect portfolios, buying oil is no longer the panacea, as if central banks react too strongly to inflation pressures building up in the economy, they could push the economy into recession leading to a $60/b oil price,” the analysts said.

The adjustments to its Multi-Asset-Portfolio come as the French bank warned investors that economic risks are significantly elevated as the global economy enters this new cycle. They said they are increasing their exposure to cash and U.S. government bonds and reducing their exposure to equities.

“We are now moving into a third, riskier phase, as inflation starts to look permanent and the inflation-towage spiral continues to whirl. The western central banks would like to fill the gaps, but rightly argue that they are too far behind the curve,” the analysts said. “To take into account more hawkish actions, particularly from the Federal Reserve, we keep our large USD exposure (55% of total) and seek to reduce further the risk content of our allocation, by cutting equities by 7 points to 42%, reducing exposure on inflation breakevens (-3 points to 5%), and increasing cash. mainly through FX carry strategies highlighting commodity currencies (+10 points to 10%).”

Although economic risks are rising, the analysts don’t see a recession or stagflation on the horizon.

Originally published on Kitco News.

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