To The Moon

It's the time to bullish on commodities, according to $Goldman Sachs(GS)$. In a new report, the investment bank notes that the value of natural resources will rise next year, driven by potential ending of the current monetary tightening cycle by the Fed, reduced fears of economic recession, hedging of geopolitical risks, and demand for "green energy" metals like copper and aluminum.

By the end of 2024, the S&P $iShares GSCI Commodity Dynamic Roll Strategy ETF(COMT)$, which tracks 24 different commodity futures contracts and is heavily weighted towards oil, could have a 12-month return of 21%, according to Goldman's forecasts. In comparison, although gold and crude oil will show up from time to time in 2023, the overall performance of commodities is not ideal.

As of November 14 this year, the return for the S&P GSCI Index was just 0.87%, and it had been falling for a long time prior to that.

Will the Fed Stop Rate Hikes?

An important basis for Goldman Sachs analysts to be bullish on commodities is that monetary policy in the US and Europe is having a diminishing effect on real GDP growth.

The Federal Reserve has embarked on an unprecedented cycle of violent interest rate hikes to cool the US economy and tame inflation, and this week's consumer price index report from the Bureau of Labor Statistics suggests those measures may be starting to work. The inflation rate fell from 3.7% in September to 3.2% in October, a significant drop from the cycle high of 9.0% hit in June 2022.

Currently, The Fed's preferred measure of inflation (Core PCE) moved down to 3.5% in October, the lowest since April 2021. The Fed Funds Rate is now 1.8% above Core PCE, the most restrictive monetary policy we've seen since 2007.

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In Goldman Sachs' view, the continued decline in inflation rates means that the Fed and the European Central Bank will stop raising rates, which will support commodity demand.

Resource Demand from EV and Clean Energy

Clean energy production is another factor supporting commodity prices in 2024. For example, the metal and mineral consumption of an average electric vehicle (around 200 kilograms or 440 pounds) is roughly six to seven times that of a comparable traditional vehicle (30 kilograms or around 66 pounds).

Similarly, the amount of minerals required to build an offshore wind farm is 13 times that of a similarly sized gas-fired power plant. These figures illustrate the basic fact that clean energy projects are highly resource-intensive.

Not only is high volume, the materials needed for electric vehicles and clean energy are also very diverse, such as the familiar metals cobalt, lithium and nickel, and equally important but less familiar minerals such as graphite. In the battery composition, graphite accounts for about half of the weight of lithium-ion batteries, while lithium accounts for only about 8% to 10%.