Goldman Sachs commodities strategists, led by Jeff Currie, have been overweight commodities since 2016, but they see a solid backdrop for gains to continue as inventories decline and demand grows.
"Robust late-cycle growth is depleting global supply chains," they wrote. "As the business cycle deepens and inflationary concerns push interest rates higher, cross-asset correlations with commodities decline and the diversification benefits of owning commodities rises with higher rates."
Emerging markets could help extend the business cycle, giving global demand "more runway."
They also note the geopolitical risks have risen in commodity producers Russia, Iran and Venezuela. Trade policy risks also add to the inflationary pressure in commodities.
At the same time, investors are skeptical of oil and commodity investments even though they typically outperform in late-cycle periods. One concern is that prices have been pumped up artificially, with, for example, metals getting a premium from China cutting supplies or oil prices rising just because OPEC and Russia are slashing production.
Investors are also skeptical U.S. trade rhetoric and foreign policy concerns are behind the premiums in some metals and oil. "The key is the persistence of the current higher prices, not that prices are likely to trend substantially higher from here like they did in 2000s," the strategists wrote.
For instance, they expect Brent crude to peak at $82.50 per barrel in July and copper to peak at $8,000 per ton in December, but they have forecast lower prices for both oil and copper in 2019.
As for aluminum, Goldman strategists have a three-month target of $2,500 per ton, then a lower $2,000 in 12 months.
Aluminum cash prices spiked last month to more than $2,600 a ton after U.S. sanctions hit Russian metals producer Rusal, responsible for 6 percent of the world's aluminum. Goldman expects Rusal assets to be restructured over the next several months. On Tuesday, aluminum was at $2,257.
The strategists also see gold heading higher. With futures trading at $1,307 per ounce Tuesday, they see the precious metal hitting $1,450 per troy ounce by the end of 2018.
Commodities are also attractive because as the business cycle ages, high levels of demand deplete supplies, creating a "scarcity premium," which is now showing up in the futures market for 13 of 24 commodities.