Commodity prices usually rally as the U.S. Federal Reserve heads into a hiking cycle, but it might be different this time, Goldman Sachs said in a note Monday.
Historically, "commodities perform the best when the Fed is raising rates," Goldman said. "This makes intuitive sense because the reason why the Fed raises interest rates is that the economy displays signs of overheating. Strong aggregate demand and rising wage and price inflation are precisely the time when commodities perform the best."
It added that rising interest rates in China also tend to coincide with better commodities performance, noting the mainland's "outsized role" in demand.
That's a driver of Goldman's overweight call on commodities, with expectations for solid performance over the coming year as the Fed raises rates and the labor market runs at full employment.
But Goldman pointed to three risks that could derail its view.
Firstly, it noted that technology changes and U.S. shale oil production could have "a profound impact" on commodity returns.
"While conventional oil production takes time to ramp up, the response time for shale is much shorter," it said. "This has increased the oil supply elasticity, which may contribute to lower commodities returns relative to historical experience even as demand strengthens."
Secondly, Goldman said the China tailwind may be waning.