After the commodity correction, demand for downside protection in gold has risen, but Goldman Sachs remains positive on its structural allocation value

Overview

This is a Goldman Sachs GOAL cross-asset research report focused on commodity price corrections, asset performance tracking, and option pricing. The report notes that as geopolitical concerns eased and energy transportation through the Strait of Hormuz gradually normalized, commodities—particularly energy—corrected rapidly in June; however, commodity indexes have still performed strongly year to date, driven primarily by energy. Precious metals, especially gold, have recently underperformed significantly, while the options market indicates rising investor demand for protection against further gold declines.

Core views

The core views are: first, the short-term commodity correction was driven mainly by the fading Middle East risk premium and the restoration of energy flows; second, the correlation between commodities and the S&P 500 has turned more positive, reducing their short-term diversification value; third, a stronger US dollar and more hawkish central-bank policy are creating cyclical pressure on gold; fourth, despite this, Goldman's commodity analysts still believe commodities provide strategic diversification value for equity and bond portfolios during supply shocks, and prefer metals supported by power infrastructure, metal demand, EVs, renewable energy, grid investment, defense spending, and AI over broad energy exposure; fifth, gold's long-term upside case remains supported by structural diversification among emerging-market central banks.

Analysis framework

The report uses a cross-asset dashboard-style analysis, combining commodity sub-index performance, correlations, option-implied probabilities, put/call skew, risk appetite indicators, fund flows, CFTC positioning, volatility, valuation, yields, recession-probability models, and equity drawdown-probability models to assess the implications of the commodity correction for global asset allocation.

Methodology notes

• Cross-asset allocationGOAL asset allocation framework

  Tactical allocation and 12-month allocation perspectives

  The report provides both a short-term tactical stance and a 12-month asset allocation bias to assess the relative allocation direction for equities, bonds, cash, commodities, and credit.

• Risk appetiteGS Risk Appetite Indicator / RAI principal component analysis

  Risk appetite indicators and principal component decomposition

  The report uses risk appetite levels, momentum factors, and principal component analysis, incorporating global growth, monetary policy, and US dollar factors into its assessment of the cross-asset risk environment.

• Option pricing25-delta put/call skew and option-implied probabilities

  Tail-risk pricing

  Gold put/call skew and Brent option-implied probabilities are used to observe changes in market pricing of upside and downside tail risks.

• Macro risk modelsMarket-implied recession and equity drawdown logit models

  Recession probability and equity-market drawdown probability

  The report presents market-implied US recession probabilities, S&P 500 drawdown and rebound probabilities, and uses Shapley values to explain the contributions of different input variables.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Gold

  One of the core assets discussed, influenced by the US dollar, real interest rates, and central-bank policy

  Strengths

  Supported over the long term by reserve diversification among emerging-market central banks; Goldman Sachs still forecasts $4,900/toz by end-2026.

  Weaknesses

  Recently experienced one of its deeper drawdowns in more than a decade, pressured by more hawkish central-bank policy and a stronger US dollar.

  Comparison

  Compared with energy, the gold options market has shifted more clearly toward pricing downside protection.

  Risks

  Further US dollar strength, higher real interest rates, more hawkish central-bank policy, and declining investor demand for safe-haven assets.

• Energy/Brent

  The primary asset affected by the retreat in the Middle East risk premium

  Strengths

  Energy remains the main driver of the commodity index's strong year-to-date performance.

  Weaknesses

  After energy flows through Hormuz normalized, Brent fell more than 10% last week and pricing of upside tail risk declined.

  Comparison

  Compared with metals, the report has less preference for pure broad energy beta.

  Risks

  Renewed escalation of geopolitical conflict, supply disruptions, weaker demand, or a further decline in the risk premium.

• Industrial metals

  Viewed as commodity exposure with stronger structural demand support

  Strengths

  Supported by EVs, renewable energy, grid investment, defense spending, and AI-related electricity demand.

  Weaknesses

  Recently also affected by the broader commodity correction.

  Comparison

  The report considers metals' diversification value superior to that of broad energy exposure.

  Risks

  Slowing global growth, a stronger US dollar, weaker-than-expected metal demand, and refining-capacity or supply-chain risks.

• S&P 500/global equities

  Reference assets for assessing the diversification effect of commodities

  Strengths

  Goldman Sachs remains modestly pro-risk over a 12-month horizon and overweight equities.

  Weaknesses

  Rising volatility in technology stocks and the shift to positive commodity-equity correlation weaken portfolio hedging.

  Comparison

  Commodities were negatively correlated with the S&P 500 during the Middle East conflict but have recently shifted toward a more positive correlation.

  Risks

  Higher US recession probability, earnings downgrades, valuation pressure, and declining risk appetite.

• Credit

  Relatively underweight asset in cross-asset allocation

  Strengths

  The report monitors cash credit and synthetic credit performance relative to equities.

  Weaknesses

  Credit is underweight in Goldman's 12-month allocation.

  Comparison

  Compared with equities, credit is less attractive under this allocation framework.

  Risks

  Widening credit spreads, rising default risk, and deteriorating liquidity.

Key data

• Brent performance last weekDown more than 10%The report states that Brent gave back most of the risk premium accumulated since the Middle East war began.
• Recovery of Hormuz energy exports>60% of normal levelsThe report states that Gulf exports recovered to more than 60% of normal levels and that energy flows continued to normalize.
• Gold option skewTurned positive for the first time since 2016Gold's three-month 25-delta put/call skew turned positive, indicating increased demand for downside protection.
• Gold long-term forecast$4,900/toz by end-2026Goldman's commodity analysts remain positive on gold's upside, citing structural diversification demand from emerging-market central banks.
• S&P GSCI 1-week/1-month/1-year returns-4.0% / -10.9% / 29.4%From Exhibit 89 of the report.
• Energy sector 1-week/1-month/1-year returns-5.8% / -16.3% / 44.0%With a 50.3% weight, energy is a major contributor to the S&P GSCI.
• Precious metals 1-week/1-month/1-year returns-4.2% / -9.8% / 24.4%Precious metals have a 9.6% weight and have significantly underperformed recently.

Impact & implications

For portfolios, commodities no longer hedge equity risk as effectively as they did at the beginning of the Middle East conflict and are more vulnerable to pressure from a strong US dollar; however, supply shocks, energy security, power-infrastructure bottlenecks, and concentration in metal refining capacity continue to support commodities' strategic diversification role. Gold faces policy and US dollar headwinds in the short term, but the options market has already reflected greater demand for downside protection; over the medium to long term, its outlook still depends on central-bank gold purchases and reserve-diversification trends.

Risks

• Renewed escalation of geopolitical conflict, causing the energy-supply risk premium to re-emerge.
• Further US dollar strength or higher real interest rates, continuing to pressure gold and other commodities.
• Persistently positive commodity-equity correlation, weakening commodities' hedging role in multi-asset portfolios.
• Rising volatility in global technology stocks and declining risk appetite, potentially weighing on risk assets.
• Macroeconomic data such as US employment, ISM, inflation, and central-bank communication coming in more hawkish could alter interest-rate and asset pricing.

What to watch

• US payrolls and ISM manufacturing data.
• Central-bank commentary at the ECB Sintra forum.
• European flash inflation and Asian June PMI/CPI data.
• Energy transportation through the Strait of Hormuz and the extent of the recovery in Gulf exports.
• Whether Brent option-implied probabilities reprice upside tail risk.
• Gold put/call skew, US dollar performance, and US real yields.
• Relative performance of energy, industrial metals, precious metals, agriculture, and livestock within the S&P GSCI.