Goldman Sachs flags downside risks for commodities before China stimulus kicks in

(Reuters) - Goldman Sachs <GS.N> said commodity prices could fall sharply before Chinese stimulus to combat the coronavirus impact later this year helps the sector achieve its 12-month return forecast of about 10%.

"The promise of stimulus has made commodity markets act like equity markets, building up risks of a sharp correction," analysts at the Wall Street bank said in a note dated Feb. 21.

The bank forecast returns of -0.5%, 4.9% and 9.5% on commodities over a three-, six- and 12-month horizon, respectively, on the oil-heavy S&P GSCI Commodity Index. <.SPGSES>

Over a 12-month period, the bank forecast returns of 14.3% from energy, 4.3% from industrial metals and a negative 0.8% from precious metals.

Commodity markets have come under pressure as mounting fears that the new flu-like virus will grow into a pandemic have heightened worries of a slowdown in global economic growth.

Oil prices tumbled nearly 3% on Monday, while base metals were hit by mounting stockpiles.

Apart from weak demand due to continued Chinese disruptions and inventories build, a slow economic pick-up may add to the risk of oil inventories exceeding storage capacity and, in turn, create a substantial downside to oil prices, Goldman Sachs said.

Gold prices, however, have gained about 5% so far this month, hitting their highest in more than seven years on Monday.

"With the global impact of China's shutdown yet to be fully felt by emerging market economies, gold has ground higher in February as fear-driven investment outweighed any wealth shock to emerging market demand for gold," the bank said.

Bullion is considered a hedge against financial and economic uncertainties.

The metal could push towards $1,750 per troy ounce if the virus is contained during the first quarter of 2020, while any extension of the epidemic into the second quarter could push prices towards $1,850, it added.

(Reporting by Asha Sistla in Bengaluru; Editing by Subhranshu Sahu)