Goldman believes this trade will return more than 20% over the next 12 months

Published Tue, Aug 31 20213:46 PM EDTUpdated Tue, Aug 31 20214:33 PM EDT

Despite the many recent macroeconomic concerns about the resurgence of global Covid-19 cases, the stalled economic reopening and how the Federal Reserve is going to control inflation, Goldman Sachs thinks the foundation is being laid for a booming rally in metals. The current environment has the makings of a commodities bull run, particularly in the metals market, which tends to outperform during rate hike cycles and haven't been too negatively affected by minor upswings in Covid, Goldman said in a note Tuesday. "From Fed tapering to China's Covid cases, these macro risks have led to what we see as an increasingly mispriced metals market, a market with cleaner positioning, tighter fundamentals and greater upside than we have seen since the start of this year," Goldman's Nicholas Snowdon said. "While these macro risks are real, history has shown that commodities – metals in particular – outperform during Fed rate hikes and remain relatively immune to COVID risks; they also possess growing structural drivers to the current bull market." The firm expects over the next 12 months to see returns of 24% on the S & P GSCI Industrial Metals index, which tracks investment performance in industrial metals. "Position for the base metals bull market," Snowdon said. "We expect this fundamental tightening environment to act as a clear catalyst for higher prices, particularly as both macro uncertainty over Fed tapering and China's delta outbreak fade." Here are four commodity funds with exposure to metals: The Invesco DB Base Metals Fund invests in exchange-traded futures on aluminum, zinc and copper. It's currently trading at about $20 per share and is up more than 33% for the year. Goldman is raising its 12-month targets on aluminum, nickel and zinc by about 10%, to $3,200 $24,000 and $3,300 per ton, respectively. It's also launching long positions in the aluminum and nickel subindexes of the S & P GSCI. It also reiterated its target on copper at $11,500 per ton as well as its long trade on the S & P GSCI Copper subindex. Copper prices are up 24% for 2021, but as Goldman notes, economic concerns have weighed on industrial metals recently. Copper futures are off by 6% the past three months. There are long-term structural reasons backing the copper trade, Goldman said. Increasing demand for copper (some analysts are saying it's "the new oil" ) is largely thanks to electric vehicles, which require several times more copper than gas-powered cars, and green energy projects. The Barclays iPath Bloomberg Copper Subindex Total Return fund is trading at about $22 per share and is up 23% for the year. It invests in copper futures and tracks the copper subindex of the overall Bloomberg Commodity Index.

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