"Strategic value for investment portfolios"! Goldman Sachs' assessment: The world is entering a "commodity control cycle"

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Goldman Sachs’ latest research concludes that as globalization stalls and countries shift toward inward-looking policies, the world is entering a “commodity control cycle.”

According to Zhuifeng Trading Desk, Goldman Sachs analysts Lina Thomas and Daan Struyven wrote in a September 3 report that, against the backdrop of stalled globalization and heightened geopolitical tensions, the traditional stocks-and-bonds portfolio appears especially fragile in the face of two types of stagflation risk (erosion of institutional credibility and supply shocks).

At this time, a “commodity control cycle” is taking shape. Goldman Sachs believes this cycle is driven by a four-stage model: governments first “insulate” and protect domestic supply chains via tariffs, subsidies, and strategic reserves; after securing self-sufficiency, they “expand” exports; this then leads to a drop in global prices, forcing high-cost producers to exit and causing supply to “concentrate” in the hands of a few dominant players; finally, these dominant players use their market positions as “leverage,” triggering a new round of supply security concerns.

The report emphasizes that, out of security considerations, countries are safeguarding domestic supply chains, making the production and processing of major commodities increasingly concentrated in a few countries and frequently used as geopolitical tools. This not only increases price volatility and inflation risk, but also highlights the necessity of holding commodities as a tool for portfolio diversification. Thus, whether it’s the analysis of energy, critical minerals, or gold, all seem to point toward the same conclusion: Commodities are becoming a core asset indispensable for hedging future risks.

Traditional stock-bond portfolios fail: Vulnerability under the specter of stagflation

The Goldman Sachs report points out that traditional stocks-and-bonds investment portfolios underperform in both types of stagflation scenarios, greatly reducing their diversification effect.

The first is stagflation from erosion of institutional credibility. When the market doubts the ability or willingness of central banks to control inflation (such as in the US during the 1970s), inflation spirals out of control, and stocks and bonds usually both fall. In this environment, gold, as a value storage “outside the system,” performs outstandingly.

The second is supply-shock-based stagflation. When external supply disruptions cause economic growth to slow and prices to rise, the affected commodities themselves become among the few assets capable of offering real positive returns. In 2022, Russia—which supplied about 40% of Europe’s natural gas at the time—cut supply, representing a typical case.

The report stresses that historical data shows that during any 12-month period when both stocks and bonds provided negative real returns, either commodities or gold always delivered positive real returns. Therefore, as concerns about the Fed’s independence resurface, diversification into broad commodities is just as crucial as gold.

The four-stage cycle: From insulation to leverage

Goldman Sachs points out that before 2008, the extension of supply chains and free flow of goods helped stabilize prices. But since then, measured by the share of global commodity trade as a proportion of GDP, globalization has stalled. As countries turn inward, commodities are taking on a more strategic role and following a “control cycle.”

Step 1: Insulation. Governments ensure supply chain security through tariffs, subsidies, and investment, substituting imports with domestic production wherever possible, and strategically stockpiling those that can’t be replaced. Examples include the US imposing tariffs on steel and aluminum, as well as central banks greatly increasing gold reserves as financial insulation after Russia’s $300 billion assets were frozen.Step 2: Expansion. Once domestic supply is secured, the surplus is used for export. Goldman Sachs expects OPEC+ is gradually releasing capacity to reclaim market share, and the US’s rapidly growing LNG exports are increasing its influence in the global energy market.Step 3: Concentration. Declining global prices force high-cost producers out of the market, concentrating supply in the hands of a few low-cost giants. China now accounts for 70% of global lithium refining capacity and over 90% of rare earth refining.Step 4: Leverage. Once supply becomes highly concentrated, dominant producers can use export restrictions as geopolitical and economic leverage, exacerbating risks of market disruption, price volatility, and inflation. This in turn prompts other countries to start a new “insulation” phase.

Supply concentration heightens geopolitical risk

Goldman Sachs backs up its claims with extensive facts and data, showing the concentration and leverage of commodity supplies is playing out on a global scale.

In energy, the report expects that by 2030, the US will supply over one-third of the world’s LNG and has already begun linking energy exports to tariff negotiations, increasing allies’ dependence on its supply.

Historical cases are frequent: in 1973, Arab nations embargoed oil, sending prices from $3 to nearly $12 per barrel. In 2022, Russia cut natural gas supplies to Europe.

At the same time, the world’s critical trade chokepoints—such as the Strait of Hormuz, Malacca Strait, and Panama Canal—further illustrate supply chain fragility. As naval protection along sea routes weakens, the impact of geopolitical risk on commodity flows is further magnified.

Implications for investors: The “strategic value” of commodities

Goldman Sachs’ analysis ultimately returns to core investor recommendations. In an increasingly divided and supply chain–fragile world, the value of commodities is being reassessed.

The report argues that the growing concentration and “weaponization” of commodity supply enhances their diversification benefit within investment portfolios. Of course, not all commodities offer the same hedging effect—this depends on two main factors: (1) the commodity’s direct or indirect weight in the inflation basket; (2) the likelihood of its supply being disrupted.

Energy scores highly in terms of inflation weight.Industrial metals and rare earths may have lower indirect weights in the inflation basket, but their supply is highly concentrated, meaning even limited disruptions can have huge market impacts.

Therefore, Goldman Sachs concludes that as the world officially enters the “commodity control cycle,” including a broad range of commodities in investment portfolios represents a forward-looking decision of “strategic value” for resisting future inflation and geopolitical shocks.

Risk warning and disclaimerThe market has risks, and investment requires caution. This article does not constitute personal investment advice, nor does it consider the special investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific situation. Investment based on this information is at your own risk. ```