Looking for clearer upside catalysts into year end

- Wheat has surged higher, but key commodities remain fragile "Commodity returns rose over the last month led by sharp gains in the agricultural complex owing to weather-related supply shocks in wheat. Additional key commodities also broke out to the upside of recent ranges in late July, driven primarily by a shift in policy tone in China, key financial uncertainties abating post European bank stress tests and the passage of US financial reform and generally positive corporate earnings, all of which boosted sentiment in risky markets. However, sentiment remains fragile and concerns about economic growth have dominated again in recent days, leading to some retracement across assets from multi-month peaks."
- Improved data will likely be required to sustain rising prices "Current soft economic data, combined with increasingly mixed signals from the commodity markets, is likely to continue to generate choppy commodity price action in the near term. In particular, although commodity demand indicators remain generally supportive, growth in Chinese implied oil demand fell sharply in July, observed oil inventories in the developed economies continue to build on a seasonally-adjusted basis and the decline in metals exchange inventories has slowed. While we expected some softness in 3Q2010, we believe that improvement in this data will likely be required before upward commodity price pressure can be sustained."
- We remain constructive on key commodities heading into year end "We maintain that high and rising emerging market demand levels against limited supply growth are likely to increasingly tighten balances, lending support to key commodities during 4Q2010. We expect upside to be greatest for crude oil, copper, zinc, platinum and gold. However, given market price action over the past month we are lowering our 12-mo returns forecasts for base metals to 15% from 25% and for agriculture to -10% from -1.0%. These revisions lead us to lower our 12-mo forecasted return for the S&P GSCI Enhanced Total Returns Index to 19% from 21.6%."

GoldmanSachs Commodity Watch 20100814

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