Commodity prices have not bottomed yet — Goldman Sachs

Commodity prices have not bottomed yet — Goldman Sachs

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While commodities are mired in the worst slump in a generation and all the market wants to hear is that the worst is already over, Goldman Sachs (NYSE:GS) warns prices may fall even further.

Unless demand picks up or more miners cut output, prices for raw materials are set to stay low for years, or worse, continue to drop, it said in a note on Thursday, FT.com reports (subs. required).

"We have been forecasting weak commodity returns since last fall, although the extent of this weakness has far exceeded our initial expectations," the analysts wrote.

Oil, copper lead the pack

Crude oil and copper are unlikely to rebound because of excess supplies, Goldman predicts. Consequently, the bank is keeping its outlook for U.S. WTI crude oil at $45 a barrel and for Brent crude oil at $50 a barrel in 2016 due to oversupply. It forecasts gold to remain at $1,100 per ounce for the next three months, $1,050 an ounce for the next six months and $1,000 an ounce for the next 12 months.

Goldman Sachs also expects copper prices to fall to $4,800 a ton by the end of this year, and to $4,500 a ton by end-2016. Spot iron ore prices are expected to decline to $44 a ton next year and $40 a ton in 2017 from around $46 a ton now.

“We don't believe that current prices present an appealing entry point to position for higher commodity returns, despite the perceived asymmetric risk-reward at low spot prices and post such weak returns,” the New York-based firm noted.

However, the bank said this should not disrupt the long-term strategic case for including commodities in asset allocation, adding that there are some hopeful signs of a recovery in the global business cycle beginning early next year.