Goldman: The Old Economy Takes its Revenge
"Shrinking money supply hides true [commodity] scarcity."
In this report, Goldman starts to lay out the implications of lower capex, depressed earnings (for Tech), shifting duration preferences (long to short) and tighter monetary policy on commodities. They come at their conclusion (Commodities will go up) from several complementary yet correlated angles. We want to focus on one tying all their concepts together: Low prices are not solving supply problems at all.
The Bank is signaling its case for higher everything again. Economic policy and incentives scream "they" do not care about the old economy despite still being reliant on it. ESG policy, no CAPEX investment, no restocking, and an increasing reliance on printing SPR oil is the tell here. That leads to a very negative feedback loop should a problem arise.
Low(ish) Commodity Prices Are Temporary
We have stated recently a couple times that Goldman is not backing off their Supercycle thesis despite retracements in most commodities during the Fed tightening. This report reaffirms that once again.
Key for them we feel, and almost buried in the short report, but nevertheless a reappearing theme for a year is this: Shrinking money supply hides true commodity scarcity. This is a linchpin of their sticking with the commodity Supercycle concept, as opposed to declaring it over with these 2022 retracements. This is also their way of saying: lower engineered prices have not solved the supply shortages in commodities in general, Oil and Copper in particular.
Demand destruction from Fed tightening has engineered lower prices for sure, but not lower inelastic demand. This has merely disincentivized restocking to handle the economic turnaround if and when it comes.
Bottom of the Oil Barrel
The most glaring example is despite incessant drawdowns of SPR Oil has resulted in no increase at Cushing or Midland oil sites whatsoever. We are still pretty close to scraping operational bottom of the Cushing barrel.
The answer to the question “Why?” is because we are refining our oil and sending it overseas to the EU. That is the most obvious example. For now just know that all along the supply chain the industry has been disincentivized to produce more for future US consumption despite the rhetoric. Some that need to restock are being lulled into a false sense of security we’d wager. Crack spreads corroborate this
We would also add echoing Oil Analyst Brynne Kelly's assertion that: Oil backwardation continues to be higher than the flat price suggests it should be. The oil industry has been completely dissuaded economically and policy wise from investing in future productivity growth. Finally, Goldman predicted Oil is likely to surge well over $100 again. From that ZH post: As a result, oil prices “are going to be headed well over $100” going into December.
Silver and Copper
Essentially, if you are bullish Copper, Silver will move more, and more recklessly. But Copper is not a controlled commodity by US pricing. Silver is. Combined, Silver is a high beta version of Copper this coming cycle.
anyone seeing a pattern here? pic.twitter.com/2N4K0KJJjF— VBL’s Ghost (@Sorenthek) November 5, 2022
Copper we are less intimate with in terms of futures term structure, but note it because it consistently resides near the top of Goldman’s list of commodities, right after oil. It also important as a confirmation commodity for Silver in the next part of the commodity cycle. They tend to parallel each other in turnarounds like this one setting up.
As to the restocking concept. They are restocking Copper globally, just not fast enough. Silver? Forget about it. The drain on both Comex and LBMA vaults tells you something is up.
If They Are Right
We’re not saying they are right. What we are saying is that if they are right, the upside is far bigger than many imagine. A deflationary washout from cratering economy, or some black swan event (like a Covid) will almost certainly foster massive monetary ease again. If that comes, expect to see more money than normal go into commodity businesses as opposed to Tech this time. The asymmetry is real. The catalysts are known. All that remains is if they are right in their bias.