Goldman (GS) calls bull on commodities (again)

Find on this link your very own download of the Goldman PDF out this morning (Tues May 24) saying loveydovey things about commodities going forward, but as a sample here's some of the script:

May 24, 2011

Turning more bullish as supply-shock concerns fade

Although near-term downside risk remains as markets adapt to a slower growth environment with supply-shock concerns fading, we now believe that the risk/reward once again favours being long commodities. Accordingly, we are shifting back to a near- to medium-term overweight recommendation, reiterating our long-term overweight and recommending fresh longs in oil, copper and zinc.


We remain structurally bullish commodities
Although we remain structurally bullish and have long argued the structural case for being long, timing does remain critical. This was evident in the recent market correction, which brought commodities down roughly 10% from their April highs. With prices now more inline with near-term fundamentals and price targets, we believe that the risk/reward once again favours being long commodities. Although the economy has likely shifted into a slower, but sustained, growth environment, we continue to expect that economic growth will likely be sufficient to tighten key supply constrained markets in 2H2011, leading to higher prices from current levels.
 
Raising oil price targets on persistent impacts from MENA events
We expect that the ongoing loss of Libyan crude oil production and disappointing Non-OPEC production will continue to tighten the oil market to critical levels in early 2012, with rising industry cost pressures likely to be felt this year. We are now embedding in our forecasts that Libyan production losses will lead to the effective exhaustion of OPEC spare capacity by early 2012. This raises our year-end Brent crude oil price forecast to $120/bbl from $105/bbl, our 12-month forecast to $130/bbl from $107/bbl and our end-2012 forecast to $140/bbl from $120/bbl.
 
Mid-cycle pause nearing a trough, creating upside to metal prices.
While a sharp decline in world economic growth remains a downside risk to commodity prices, we see the current slowdown in economic growth as part of a normal mid-cycle pause, partially driven by higher commodity prices, and therefore not a reason to expect commodity prices to decline substantially. Further, we believe that the recent evidence of economic weakness represents signs of a slowdown and not a downturn, which is reinforced by signs that Chinese metal demand has already returned with the SHFE-LME copper arb opening again, exchange inventories declining and the Shanghai copper forward curve moving into backwardation.

It then goes on to call long on things like copper gold and oil, but for me the most interesting call out of the Vampire Squid this morning is the new long call on zinc. Go read it for yourself to find out more.

What Goldman Sachs thinks about gold right now

If you want to read a copy of the nine page report out of GS yesterday then mail me (for some reason I can't get it to download into the normal filesharing site) but here's the text from the front page that gives the quickread of contents below the fold. Suffice to say that Goldman likes gold (and who am I to argue?).

Gold set to rally as events send US real interest rates lower 

Optimism over the state of the global economic recovery at the start of the year, which drove US real interest rates sharply higher – and gold prices lower – has been tempered by the ongoing events in the Middle East and North Africa (MENA) and Japan, sending the 10-year US TIPS yield down to near 80 bp, setting the stage for the next gold price rally.

We expect gold prices to rally toward our 3-month price target of $1480/toz, and continue to recommend a long gold trade. While the protests and threat to oil supplies in the Middle East and North Africa drove COMEX gold prices to a new record high of $1437/toz on March 2, the events in Japan have paradoxically sent gold prices back below $1400/toz despite the ongoing decline in US 10-year TIPS yields. Given the decline in US real interest rates, we see the recent retracement in gold prices as offering a good buying opportunity, and maintain our long gold trading recommendation as we expect gold to rally to our 3-month price target of $1480/toz.

We see strong upside to gold prices in the near term, but continue to expect rising US real rates to lead prices to peak in 2012. We expect gold prices to move higher throughout 2011, but continue to believe that gold at current price levels is a compelling trade, not a longterm investment. In particular, we expect that as US real interest rates rise with the recovery in the US economy, gold prices will likely reach a peak in 2012.

We expect gold to rally following the recent events, but the PGM outlook is increasingly tied to the speed of Japan’s recovery. The sell-off in PGM prices accelerated after the Japanese earthquake, with platinum prices down 5% and palladium prices down 9% this week. While PGM prices softened with the rise in oil prices accompanying the MENA events, the recent declines reflect the potential loss of autocatalyst demand from idled automobile manufacturing in Japan. Not only does Japan account for 12.6% of global automobile production, it also accounts for a large share of global industrial PGM consumption: 16.4% for platinum and 18.1% for palladium in 2010.