UNITED STATES (OBSERVATORY NEWS) — Goldman Sachs said commodity prices could drop sharply before a Chinese stimulus to combat the impact of the Coronavirus later in the year helps the sector achieve its expected return in 12 months by nearly 10 percent.
“The pledge of stimulus has made commodity markets move like equity markets, which reinforces the risk of a sharp correction,” analysts with the bank said in a note on February 21.
The bank expects returns of -0.5 percent, 4.9 percent and 9.5 percent on commodities over a period of three, six and 12 months, respectively, on the benchmark Standard & Poor’s GSCI commodity replete with oil.
Over a 12-month period, the bank expects a return of 14.3 percent of energy, 4.3 percent of industrial minerals and a negative return of 0.8 percent of precious metals.
Commodity markets are under pressure as growing fears that the flu-like Coronavirus will turn into an epidemic are fueling concern over a slowdown in global economic growth.
Oil prices fell about three percent today, while prices of industrial minerals were negatively affected by the increase in stocks.
Goldman Sachs said that unlike weak demand caused by persistent unrest in China and stockpile accumulation, a slow economic recovery may add to the risk that oil stocks will exceed storage capacity and thus lead to a significant drop in crude prices.
But gold prices have gained about five percent since the beginning of this month to reach their highest levels in more than seven years today.
The yellow metal is considered a hedge in the face of financial and economic uncertainty.
Goldman Sachs added that gold may move towards $ 1750 an ounce if the virus is contained during the first quarter of 2020, while any continuation of the epidemic in the second quarter may push prices towards $ 1850.
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