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Goldman Sachs: Why It Forecast a Decline in Metals

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Bearish factors still remain the same

On March 8, 2016, Goldman Sachs said that considering the lack of improvement in the demand factors from China, the bearish factors that drive the metals’ bear market didn’t change.

According to the research note released by Goldman Sachs, the positive movement in copper prices since the beginning of this year is due to short covering. It was triggered by the rise in Chinese credit in January and the depreciation of the US dollar. It wasn’t due to recovery in the economy. The research note also added that the improved credit in China wasn’t aimed towards the manufacturing sector. It was aimed towards the high consumption sectors and simulating services.

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Recommendations for base metals

As part of its recommendations, Goldman Sachs asked long-term investors and producers to hedge. It also recommended shorting aluminum and copper. In its one-year view, Goldman Sachs forecast a downfall of 18%–20% in copper and aluminum prices. In addition to this, the bank expects copper and aluminum to fall to $4,000 per metric ton and $1,350 per metric ton in the next 12 months. Considering the 25% rise in zinc prices from its lows, Goldman Sachs thinks that it’s risky to have a long position in zinc given the chances of the restart of China’s zinc production at higher prices.

Copper is trading 15% above the January lows

Copper in the London Metal Exchange made a multiyear low of $4,331 per metric ton on January 15. Currently, it’s trading at $5,000 per metric ton—15.45% higher than the multiyear low. Last week, the economic releases from China along with the hopes of additional economic stimulus supported copper prices. Last week, it resulted in a surge of 6.83%. Along with copper, major base metal producers like Freeport-McMoRan (FCX), Alcoa (AA), Glencore (GLNCY), and BHP Billiton (BHP) rose 31%, 7.89%, 25.36%, and 22.7%, respectively, last week. The Power-Shares DB Base Metals Fund (DBB) gained 3.92%. In the next part, we’ll discuss the price action of major base metal miners on March 7.

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