Goldman Sees Negative Loop in Commodities From Excess Money By Ben Sharples (Bloomberg)

It’s going to take a prolonged slump in
commodities to break a cycle of too much money and excess
production, according to Goldman Sachs Group Inc.
The market is caught in a “negative feedback loop,” where
lower raw-material prices are strengthening the dollar and
lowering production costs for countries with weaker currencies,
Goldman analysts wrote in a report. That boosts the prospects of
higher U.S. interest rates and a reduction in emerging-economy
debt, according to the bank. Demand for commodities will
subsequently decline, capping prices and further reinforcing the
greenback, it said.
“Commodity markets still have access to far too much
capital relative to future demand and a declining cost
structure,” analysts including Jeffrey Currie in New York wrote
in the note. “Long-term surpluses in most commodity markets
require prices to remain lower for longer to balance both the
near-term physical supply and demand, but more importantly, the
longer-term supply and demand for capital to fund future
investments.”
If longer-term prices don’t decline further to restrict
capital, the availability of funds will exacerbate the market
oversupply, the bank said. That will force prices to a level
where it’s no longer viable to keep producing, according to
Goldman. The commodity slump may last five to 10 years, Currie
said Wednesday in an interview with Stephanie Ruhle and Erik
Schatzker on Bloomberg Television’s “Market Makers.”