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As the West steps up sanctions against Russia in the aftermath of a full-scale invasion of Ukraine, Goldman Sachs raised its commodities price forecasts, citing supply disruptions and an even more problematic inflation outlook.
The commodities to pay close attention to are the ones Russia is a major producer of — oil, gas, aluminum, palladium, nickel, wheat and corn.
"The range of near-term price outcomes for commodities has become extreme, given the concern of further military escalation, energy sanctions or potential for a cease-fire," Goldman said in a note to clients on Sunday. "We expect the price of consumed commodities that Russia is a key producer of to rally from here."
Gold is another safe-haven commodity that is due for a much bigger rally going forward, according to Goldman.
"The recent escalation with Russia create clear stagflationary risks to the broader economy, driven by higher energy prices, which reinforce our conviction in higher gold prices in coming months and our $2,150/toz (troy ounce) price target," Goldman said.
In reaction to additional sanctions against Russia, gold surged above $1,916 an ounce on Monday. Some gains were lost as the trading session progressed, with April Comex gold last at $1,905.70. But the precious metal is still set for the best monthly performance since May.
Goldman explained that gold would play a central role in this conflict as Russia turns to the precious metal for leverage amid sanctions. Russia's gold reserves total 2,298.53 tonnes, according to World Gold Council.
"Gold's unique role as the currency of last resort will likely be apparent if restrictions on Russia's central bank accessing its offshore reserves leave it leveraging its large domestic gold stockpiles to continue foreign trade, most likely with China," the bank said.
Gold price could hit $2,000 'in only a matter of days' - analysts
Also, Goldman increased its one-month Brent crude oil price projection to $115 a barrel from $95, adding that Russia is becoming more isolated as the West's sanctions kick in. "[For Brent, there is] significant upside risks on further escalation or longer disruption," the note added.
At the time of writing, Brent was trading above $100 per barrel and the U.S. West Texas Intermediate (WTI) was at around $96.
From the macro perspective, Goldman raised its inflation outlook, stating that it is "increasingly concerned" about the pace of inflation in 2022. "A very high inflation path in 2022 should make an easy case for steady rate hikes at all seven remaining" Federal Reserve meetings in 2022, said Goldman economist David Mericle said in another note to clients.
The bank now expects core inflation to run at 3.7% through the end of this year. Its previous estimate was at 3.1%. In light of this, Goldman is estimating to see seven rate hikes in 2022 and another four in 2023.
The first rate hike will likely come on March 16, with the CME Fed WatchTool projecting a 92.5% chance of a 25-basis-point hike.
By Anna Golubova
For Kitco News
Time to buy Gold and Silver on the dips
