Commodities are not getting enough attention like the stock markets or bond. It is also a rare occasion when the timing is stronger than ever to invest in it. Goldman Sachs analysts think that the current period looks stronger for owning commodities. The Bloomberg Commodity Index is already up over 2.5 percent this week, which is the biggest in a period of two months. Another metric, S&P GSCI Index, which is a raw materials gauge, also jumped more than five percent in the current week. That would mean reaching the levels seen last in 2014.
Reasons behind the Surge
Analysts, Jeffrey Currie, cited that raw materials have rallied on the back of increasing political tensions in the international arena. He also pointed out that the economic growth remained strong. Therefore, Goldman Sachs reiterated their rating on Commodities to an ‘Overweight.’ The brokerage also reaffirmed their opinion that commodities would provide 10 percent yield returns in the next one-year period, according to a Bloomberg report.
One of the primary reasons behind the current weekly gain is crude. Incidentally, the commodity is set for the best weekly gain after July last year. Similarly, aluminum looked to post the biggest rally after the year 1987. Investors dealing in oil were worried over the political issues in the Middle East disruptions after the American president, Donald Trump has threatened to bomb, Syria, a Russian ally. For its part, Saudi Arabia has shot down missiles fired by dissenters in Yemen. There is also a threat of increasing concern that the United States would not mind re-imposing sanctions on Iran to curb its exports.
Another point is that the sanctions of the United States on United Co, Rusal, Russia-based aluminum producer, have cast its shadow on the aluminum market. Buyers of aluminum have to look for suppliers. The brokerage stated that “With low cross-asset correlations, increasing inflationary risks, a positive carry and the potential for oil supply disruptions in the Middle East, the strategic case for owning commodities has rarely been stronger.”
As far as the Brent crude, which is the benchmark for over 50 percent of the global oil market, witnessed an expansion of 7.8 percent in the current week to hit $72.33 in London in the morning. Similarly, the U.S. West Texas Intermediate futures gained 8.6 percent to $67.38. This was due to investors leaving the concerns that the boom in the United States would only weaken the curbs put by OPEC on oil output.
There is again the talk of the American slapping sanction against Iran after the global powers brokered a deal. There is a clear-cut indication from the appointment of National Security Advisor, John Holton, and Secretary of State, Mike Pompeo, as these two are considered as Iran hawks. As a result, there is an increased belief in possible sanctions by Trump.
In case it becomes a reality, then refiners from the European Union would be forced to reduce imports from Iran. The region accounts for 25 percent of Iran’s exports of oil. The key point is whether these flows would be redirected to Asia or would be curbed.