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A recent strategy notes from Goldman’s commodities team says the bull market is far from over and commodities could rally almost 20% this year:

“Although commodities overall have performed extremely well since the end of November, what has been notable is the performance of the more cyclical commodities like oil and copper, which joined the rally in agricultural commodities even as gold prices faltered. This is the first time since the summer of 2009 that gold did not lead the commodity complex higher on a sustained basis, which highlights the substantial changes that have occurred in the global financial landscape in recent months as the US economic recovery has shifted onto a much more solid footing. This shift is central to our view for 2011, as we expect cyclical commodities to enter a bull market, augmenting the bull market in agricultural commodities that began in 2010.

On net, while near term we are Neutral on commodities given the sharp run up in prices during December, on a 6-mo and 12-mo basis we remain Overweight and are raising our 12-mo return forecast on the S&P GSCI Enhanced Total Return index to 18.6% due to sooner-than-expected backwardation in many commodity forward curves. Driving this return is not only cyclical commodities like oil and copper where we maintain very positive medium-term views, but also the agriculture and livestock sectors.”

As mentioned above, they are very bullish about cyclical commodities.  This meshes with their overall outlook for the economy in 2011 and their equity outlook which represents a very bullish outlook based on a strong economic recovery (see here for details).  Their favorite trades follow:

Figure 1

Source: Goldman Sachs

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