Goldman says the case for commodities 'has rarely been stronger'

Published Mon, Feb 14 20229:59 AM ESTUpdated Mon, Feb 14 20228:45 PM EST

Commodities have outperformed equities so far this year, and Goldman Sachs thinks there's more upside ahead for two particular areas. The firm highlighted oil and gold as the two commodities with potential. "We reiterate our view of the advantages of adding commodities to a portfolio in the current environment," the firm said Monday in a note to clients. "[N]ot only are commodities a geopolitical hedge, they are also an inflation hedge, and a hedge against valuation risk from shifting central banks reaction function." Overall commodities are Goldman's top asset class recommendation, despite recent outperformance. Oil prices turned lower on Monday morning after earlier rising to the highest level in more than seven years as tensions between Russia and Ukraine escalate. West Texas Intermediate crude futures , the U.S. oil benchmark, hit $94.94 per barrel in overnight trading, but was about 0.4% lower at $92.67 per barrel just before 10 a.m. on Wall Street. Russia's Foreign Minister Sergey Lavrov has reportedly told Russian President Vladimir Putin that the Kremlin should pursue a diplomatic route to obtain concessions from the West, according to Reuters. The report follows comments from U.S. National Security Advisor Jake Sullivan on Friday that an invasion "could begin at any time." Goldman believes that any actual disruptions to food and energy flows out of Russia will be minimal. But given the "severe depletion" in major commodity markets, everything counts. "[E]ach shock increases the odds of another disruption, with shortages in one market driving shortages in another," the firm's analysts, led by Jeffrey Currie, said. When it comes to oil prices, the firm said there's a "clear upside skew... on both a tactical and strategic basis" due to tight inventory, low spare capacity and a less elastic U.S. shale industry. International oil benchmark Brent crude also eased from multiyear highs and last traded 0.6% lower at $93.87 per barrel. Goldman said prices can rise about $30 more — to $125 — before demand destruction will kick in and balance the market. Gold futures advanced more than 1% on Monday to $1,864.60 after rising 1.9% last week for the best week since Nov. 12. Overall, Goldman said that "... the case for commodities has rarely been stronger." There are a number of ways for investors to gain exposure to the commodities trade beyond holding futures contracts. The SPDR Gold Shares ETF is physically backed, while the VanEck Gold Miners ETF tracks some of the players in the space. Meanwhile, the United States Oil Fund seeks to track the price of crude, and the Energy Select Sector SPDR ETF tracks the largest U.S. players in the energy space. — CNBC's Michael Bloom contributed reporting.

Oil field worker, Miguel Holguin, operates a swabbing rig in a field in Seminole, TX, September 19, 2019.

Adria Malcolm | Reuters

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