When Interest Rates Fall, Commodities Rise – It’s a Historical Pattern

When Interest Rates Fall, Commodities Rise
Published on: Apr 1, 2024

Goldman Sachs recently released a report stating that if interest rates fall, commodity prices could rise, hence maintaining a positive outlook for commodities, with a year-end total return target of 15%, with some sectors expected to exceed 20%. Under the expectation of interest rate cuts, commodities as a whole showed a slight upward trend in the first quarter, with strong movements in crude oil, gold hitting historic highs, and copper breaking the key resistance level of $9,000 per ton.

Many large financial institutions predict that the Federal Reserve will have a series of interest rate cuts this year, potentially up to 3 times. Allianz expects the Fed to adjust monetary policy in July, forecasting a total of 100 basis points cut by the end of 2024 and a further 75 basis points cut by the end of 2025. Additionally, the financial services giant also predicts that the European Central Bank will lead the way in this rate-cutting cycle, initiating the cuts a day before the Fed.

It is evident that Goldman Sachs’ bullish view on commodities is primarily based on interest rate cuts, and the bank has supported this logic through historical data analysis. Goldman Sachs analysts point out that in an environment without economic recession, material prices tend to rise during periods of declining interest rates.

Specifically, after a 100 basis point decrease in interest rates, the two-year return on commodities is positive, with copper, gold, Brent crude oil, and aluminum benefiting the most. In Goldman Sachs’ year-end forecast, copper is projected to reach10,000 per ton, aluminum at 2,600 per ton, and gold at $2,300 per ounce.

The correlation between commodities and interest rates can be attributed to multiple factors, such as the decline in borrowing costs driving up raw material demand, and investors opting for alternative assets in a low-yield environment. Recent key drivers include the global manufacturing recovery driven by inventory restocking, ongoing geopolitical risks, and the potential for the U.S. economy to avoid recession and achieve a soft landing.

Moreover, demographic trends like aging populations and rising public debt levels indicate a potential increase in inflation levels. To hedge against this inflation risk, investors may allocate more to commodities.

In addition to Goldman Sachs, Macquarie Group previously stated that driven by tightening supply and global economic improvement, commodity prices are entering a new cycle of cyclical increases. Jeff Currie of Kerr Group stated that if the Fed cuts rates in the coming months, he would be bullish on commodities, especially oil and copper. J.P. Morgan emphasized the rising potential of gold, calling it the preferred commodity in the market and predicting gold prices could reach $2,500 per ounce this year.

Copper Gold Interest Rate Oil & Gas