Goldman Sachs sees iron ore prices headed lower in 2016

Commodity markets had gotten ahead of themselves as investors' views on reflation, realignment and re-levering shifted towards the upside, that resulted in a "premature" surge in commodity prices that would prove 'self-defeating' in so far as it risked prolonging the re-balancing process, Goldman Sachs said in a research note sent to clients.

"The longer [prices] run, the more destabilizing they become to the nascent rebalancing they are trying to price," the broker's commodities team led by Jeffrey Currie said in a research note sent to clients and dated 7 March.

Particulary worth noting, Currie pointed out to clients that commodity markets were physical spot markets, as opposed to markets for financial instruments and other assets which were discounting mechanisms which tried to anticipate the future.

Also, the Goldman Sachs team's macroeconomic view was apparently predominated by the belief that investors had misinterpreted the recent spate of upbeat manufacturing and credit data out of the Eurozone and China, respectively, relative to economic figures from the US, as the main driver behind weakness in the US dollar.

No mention was made of any changes in the market outlook for Fed policy.

In the case of China, for example, they believed credit growth was running too high relative to the rate of growth in the economy, "underscoring the need for deleveraging."

For iron ore, the broker stuck to its forecast for $35 a tonne at the end of 2016. Recent gains were driven by the need for higher steel prices so that mills' margins increased enough to justify restarting production.

"We believe this rally too will likely prove temporary and are maintaining our end-of-year target of $35/t," Goldman said.

Crude oil futures on the other hand would remain stuck between $20 and $40 barrel in the near-term they said.

"The current oil market is still in a large surplus as witnessed by last week’s large US inventory build and the large global stock overhang. To keep the financial pressure on producers, we maintain our near-term view of a trendless oil market with substantial volatility between $40/bbl (under which creates financial stress) and $20/bbl (under which creates operational stress)."

Goldman also stood by its 'bearish' view on gold, explaining that: "This gold rally was driven by a lack of conviction in divergence in US growth as a weak US dollar has been highly correlated with a higher gold price. We believe this realignment view of weak global growth is not supported by the US data, which will likely reinforce higher US yields, a stronger US dollar and the return of divergence, particularly should strong US consumer growth dissolve market fears regarding US growth."

The broker's near-term target for gold was $1,100 per ounce.