April 15, 2011

Global

Commodity Watch

Commodities Research

Growing conviction in NT downside, but longer-term upside intact
Mounting downside risks to current exceptionally high crude oil prices are leading us to recommend an underweight allocation to commodities on a 3 to 6-month horizon, but we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year.

We recommend shifting allocation to underweight for now...
Commodity returns have substantially outperformed, owing largely to the loss of Libyan oil production and concerns that unrest in the Middle East and North Africa (MENA) could lead to losses in another oil producing country. However, while contagion risk remains elevated, we maintain that crude oil prices have pushed ahead of where fundamentals currently suggest and that the near-term downside risk to prices has risen in recent weeks as oil prices have climbed to exceptionally high levels last seen in the spring of 2008. Not only are there now nascent signs of demand destruction in the United States, but also elections in Nigeria, a potential ceasefire in Libya and record market length on contagion fears. Further, softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011, and recent gold price strength has pushed us close to our near-term price targets. As a result, we now recommend an underweight allocation to commodities on a 3 to 6-month horizon.

Allison Nathan
(212) 357-7504 allison.nathan@gs.com Goldman Sachs & Co.

Jeffrey Currie
+44(20)7774-6112 jeffrey.currie@gs.com Goldman Sachs International

David Greely
(212) 902-2850 david.greely@gs.com Goldman Sachs & Co.

Damien Courvalin
(212) 902-3307 damien.courvalin@gs.com Goldman Sachs & Co.

Joshua Crumb
+44(20)7774-2535 joshua.crumb@gs.com Goldman Sachs International

... But we still see upside for commodity returns on 12-mo horizon
We maintain that commodity returns still have upside on a 12-mo horizon, particularly following the correction in oil prices that we anticipate, barring further oil supply shocks. Barring further persistent increases in oil prices that damage demand, we expect demand growth to continue to outpace supply growth, leading to much lower inventories and OPEC spare capacity later next year, which would be hastened should the Libyan outage persist. We also believe that stock-out for copper has been deferred, not avoided, and is now likely to occur during 2Q2012 while we expect low real rates will continue to lead gold prices higher into 2012. Finally, we forecast higher soybean prices on an expected deficit and believe that low inventories skew price risk to the upside across key grains. We therefore maintain an overweight recommendation to commodities on a 12-mo horizon, but are lowering our 12-mo return forecast to 10.0% from 14.3%.

Samantha Dart
+44(20)7552-9350 samantha.dart@gs.com Goldman Sachs International

Johan Spetz
+44(20)7552-5946 johan.spetz@gs.com Goldman Sachs International

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For important disclosures, see the text preceding the disclosures or go to www.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc.

Goldman Sachs Global Economics, Commodities and Strategy Research

April 15, 2011

Global

Hedging and trading recommendations
Petroleum
Hedging recommendations
Consumers: Concerns about the potential for further oil production losses in the Middle East and Northern Africa (MENA) have pushed prices ahead of where fundamentals currently suggest. Consequently, we recommend waiting before hedging core long-dated volumes. However, with effective OPEC spare capacity now below 2 million b/d, any further supply disruption will push prices up sharply, suggesting consumers should consider options strategies to mitigate this upside risk to prices. Refiners: Refining margins have recently shown counter-seasonal strength. However, this strength largely owes to the local weakness in WTI. As we expect the spread between WTI and Brent will narrow from current levels, we also expect product cracks to weaken. Further, we maintain that refining margins will remain under pressure owing to the large increase in refining capacity in Asia. As a result, we view any renewed rise in long-dated refinery margins in 2011 as a selling opportunity for refinery hedgers. For 2012 and beyond, we believe that crude will be the bottleneck in the system, rather than refining; this will squeeze margins from the crude side through backwardation, suggesting that refiners should also look for potential time-spread hedges. Producers: The risk-reward trade-offs for producer risk management programs have improved significantly as crude prices have reached the levels of spring 2008. We maintain that prices have pushed ahead of where fundamentals currently suggest and believe that the market will likely experience a substantial correction in coming months, barring another supply disruption. We recommend that producers look at option strategies to hedge against this risk.

Trading recommendations
We have no petroleum trading recommendations open at this time.

Natural Gas
Hedging recommendations Consumers: We believe that the opportunities for consumer hedging in the long end of the
NYMEX natural gas curve, particularly in calendar 2015 and 2016 contracts, have diminished after price gains in recent weeks. Although the renewed nuclear safety debate and demand from the transportation sector may add further upside to longer-term natural gas demand, we view the risks to long-dated prices as more balanced now compared to earlier this year. In the UK market we believe opportunities for consumer hedging are equally limited at this point, as European prices have also posted large gains recently as they are more directly exposed to the recent events in the MENA region and Japan.

Producers: Given the recent price gains, we see hedging opportunities opening up for US producers, especially in 2012 and beyond.

Trading recommendations
We have no natural gas trading recommendations open at this time.

Goldman Sachs Global Economics, Commodities and Strategy Research

2

assuming normal planting weather in the US. we expect US real interest rates to begin to rise into 2012. any weather disappointment will likely send prices sharply higher. We believe that while average weather conditions will bring crop prices lower. Agriculture Hedging recommendations Consumers: Our expectation of further corn and soybean price upside and the backwardated futures curve offer opportunities for consumers to layer in upside protection. Goldman Sachs Global Economics. Nevertheless.459. We do not believe that nickel or aluminum prices have strong upside potential off today’s levels.2/toz gain). Further. 2011 Global Base Metals Hedging recommendations Consumers: We believe that “cost-push” support stemming from tightening hydrocarbon markets will likely keep prices elevated in the near term. Producers: While we expect gold prices to increase in 2011. we now believe that extreme cyclical tightness originally expected to develop later this year in copper will likely be deferred. Trading recommendations Long Gold: Buy December 2011 COMEX Gold (Current value of $1. we believe that further upside is likely limited from current levels across metals. For cotton. We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing will keep US real interest rates low. as well as further energy and FXrelated marginal cost inflation. However. particularly for calendar 2012 and beyond.4/toz. we continue to see cyclical tightness developing in these markets over the medium term. to layer in asymmetric upside hedges for Dec-11 maturities and beyond. Commodities and Strategy Research 3 . As a result. we recommend near-dated consumer hedges in gold. Precious Metals Hedging recommendations Consumers: We expect gold prices to continue to climb in 2011 as the resumption of quantitative easing should keep US real interest rates low. we see less urgency for consumer buying at these levels. our view that downside risks will likely increase heading into 2012 suggests this is a good time for gold producers to begin scaled-up hedging of forward production. we recommend consumers take advantage of potentially lower prices in the coming months. Consequently. $95. Trading recommendations We have no base metals trading recommendations open at this time. with the current round of QE set to end in June 2011. likely causing gold prices to peak in 2012. Producers: We maintain that the current historically high price environment looks attractive for producer hedging across metals.April 15. and our US economics team now forecasting strong US economic growth in 2011 and 2012. However. reinforcing our view that still near-record high prices are offering a compelling hedging opportunity. suggesting that fundamental headwinds in coming quarters could offer some opportunities for longer-dated purchases.

92/bu First recommended Initial value Current Value Current profit/(loss)1 ¹As of close on April 13.52/bu. $1. 2010 . Goldman Sachs Global Economics.4/toz $95. 2011. 2011 Global Producers: Our expectation for wheat prices below the current forward curve over the medium term points to opportunities for producers to take advantage of the current higher levels and implement long-dated hedge programs.2/toz $1.52/bu $1.Precious Metals $1.459.364. Trading recommendations Long soybeans: Buy November 2011 CBOT soybeans (Current value of $13. 2010 . Source: Goldman Sachs Global ECS Research. We recommend holding long Nov-11 soybean positions as we see soybeans as the crop most likely to remain in a deficit in 2011/12 on strong demand and acreage loss to corn and cotton.92/bu gain).April 15.60/bu $13. Inclusive of all previous rolling profits/losses.2/toz November 18.Agriculture Update $11. Commodities and Strategy Research 4 . Current trading recommendations Current trades Long Soybeans Buy November 2011 CBOT Soybean Long Gold Buy December 2011 COMEX Gold October 11.

25 32. Commodities and Strategy Research 5 .4 -8.3 1.7 41.8 36.17 4.04 0.4 0.00 107.3 2010 12.3 24.0 29.23 42.5 46.0 10.5 33.4 1388 31.22 2.2 5.7 4. Goldman Sachs Global ECS Research.5 -2.9 7.10 1.50 103.5 2011 YTD 13.77 2.95 9.0 29.07 5.6 522 1002 386 71 139 3259 23.50 2.7 16.1 1.9 27.31 3.50 100.82 29.60 99. and 12-months time.19 0.8 33.60 2.93 31.5 93.21 76.6 -11.50 $/mt $/mt $/mt $/mt 2643 9510 26255 2421 98 320 305 146 22.45 2.2 39.1 2037 6677 17593 2241 2037 6677 17593 2241 2199 7274 20163 2307 2122 7042 22431 2052 2110 7278 21271 2043 2365 8614 23619 2333 2200 9300 19500 2400 2200 9600 19500 2400 2200 11000 19500 3100 $/troy oz $/troy oz 1455 40.27 19.0 750 1575 700 125 175 2700 20.0 7.7 1565 26.0 100.3 27.0 58 7 96 -24 7 -394 -4.1 0.24 3.0 115.8 -0.6 n/a n/a 1.78 13.0 69.6 5.9 1480 24.06 n/a n/a 46.7 707 1245 562 128 205 2856 29.0 95.00 2.1 -9.06 0.25 0.7 25.13 75.91 4. Based on LME three month prices.35 37.76 n/a n/a n/a -3.8 118.01 1.6 57.68 85.94 4.3 -2.11 122.35 78.17 2.0 95.9 653 1035 422 87 174 2863 20.00 43. 1-mo realized volatility).2 3.75 42.00 105.2 cent/bu cent/bu cent/bu cent/lb cent/lb $/mt cent/lb cent/lb cent/lb 753 1334 756 181 281 3066 24.93 2.6 10.07 4.1 26.5 3.41 2.4 2009 21. Source: Standard & Poor’s. Goldman Sachs Global Economics.99 33.24 87.0 7.0 105.78 4.88 3.0 4.8 496 955 370 76 134 3070 24.2 12-Month Forward 12-mo Forecast 10.5 71.10 0.1 29.4 4.1 17.5 -1.2 786 1379 670 179 257 3307 30.5 12.05 79.0 750 1575 780 125 200 2700 20.3 -17.2 775 1500 860 150 235 2700 25.0 18. Price forecasts refer to prompt contract price forecasts in 3-.00 2.3 2.79 3.52 105.2 4.9 16.4 33.7 28.68 2.20 56.2 86.3 34.3 38.5 34.9 53.4 5.5 35.6 83.12 0.3 94.01 4.5 32.94 1.35 0. 2011 Global Price actions.5 69. 6-.48 76.0 Monthly change is difference of close on last business day and close a month ago. Source: Goldman Sachs Global ECS Research.7 18.11 2.87 3.2 33 6.5 30.5 111.25 44.2 31.7 467 957 355 81 140 2987 15. S&P GSCI Enhanced Commodity Index and strategies’ total return and forecasts1 Current Weight (%) S&P GSCI Enhanced Commodity Index Energy Industrial Metals Precious Metals Agriculture Livestock 100. Gas UK NBP Nat.74 2.25 0.3 30.6 1110 16.14 60.4 8. Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied volatility.54 1.4 90.4 32.0 13.9 -0.6 44.2 5.80 1.0 20.00 2. volatilities and forecasts Prices and monthly changes1 units Energy WTI Crude Oil Brent Crude Oil RBOB Gasoline USGC Heating Oil NYMEX Nat.1 15.17 0.96 2.2 -10.0 1 YTD returns through March 31.1 1690 28.37 2.9 34.7 1099 17.88 77.83 78.0 1370 26.6 23.20 -1.50 105.2 95.56 2.0 2.8 40.4 -0.8 1.8 n/a n/a n/a 39.6 36.8 82.01 4.0 16.0 120.April 15.98 51.7 81.3 1228 19.00 4.1 1.0 115. Gas Industrial Metals4 LME Aluminum LME Copper LME Nickel LME Zinc Precious Metals London Gold London Silver Agriculture CBOT Wheat CBOT Soybean CBOT Corn NYBOT Cotton NYBOT Coffee NYBOT Cocoa NYBOT Sugar CME Live Cattle CME Lean Hog 1 2 3 4 Volatilities (%) and monthly changes2 Change Realized2 Change 4Q 09 1Q 10 Historical Prices 2Q 10 3Q 10 4Q 10 1Q 11 Price Forecasts3 3m 6m 12m 13 Apr Change Implied2 $/bbl $/bbl $/gal $/gal $/mmBtu p/th 107.9 1197 18.7 76. 2011.6 7.9 -0.74 94.0 -1.0 79.

we now recommend an underweight allocation to commodities on a 3 to 6-month horizon. Accordingly. Not only are there now nascent signs of demand destruction in the United States. tighter inventory management and the negative shock to supply chains resulting from the earthquake in Japan. Further.450 1.150 1. with current inventories at exceptionally low levels across many of the key grains.000 Nov-09 540 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 640 740 790 690 S&P500 Source: S&P.050 1. but also elections in Nigeria. Exhibit 1: Commodity returns have substantially outperformed other asset classes in the recent period. S&P GSCI (rhs) Reinforcing this shift is limited upside for base metals from current historically high levels. the only sector where we see near-term upside is agriculture. a potential ceasefire in Libya and record market length on contagion fears. Goldman Sachs Global Economics. 2011 Global Growing conviction in N-T downside. We have also approached our near-term targets on gold.300 1. Commodities and Strategy Research 6 . owing largely to the loss of Libyan oil production and concerns that unrest in the Middle East and North Africa (MENA) could lead to losses in another oil producing country (see Exhibit 1). owing largely to concerns over MENA contagion and an associated large oil supply shock Index levels 1.April 15.400 1.350 1. which have softened near-term balances and have pushed out the timing of stock-out in the tighter metals such as copper.200 1. but longer-term upside intact Mounting downside risks to current exceptionally high crude oil prices are leading us to recommend an underweight allocation to commodities on a 3 to 6month horizon. we maintain that crude oil prices have pushed ahead of where fundamentals currently suggest and that the near-term downside risk to prices has risen in recent weeks as oil prices have climbed to exceptionally high levels last seen in the spring of 2008.500 840 1. As a result. in our view.100 590 1. However. softening near-term base metals balances suggest that a stock-out in copper inventories and associated price spikes has now been deferred beyond 2011. and recent gold price strength has pushed us close to our near-term price targets.250 1. while contagion risk remains elevated. largely owing to Chinese consumer destocking. but we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year. Commodity returns have substantially outperformed.

We also expect low real rates will continue to lead gold prices higher into 2012. before monetary conditions begin to shift gold risk to the downside. we maintain that soybean price risk is skewed to the upside over the next year on an expected deficit in the upcoming crop year and that price risk for other key grains is substantially skewed to the upside given current low inventories. but are lowering our 12mo return forecast to 10. barring further oil supply shocks. Further. We therefore maintain an overweight recommendation to commodities on a 12-mo horizon. In addition. we note that while we have lowered our near-term allocation recommendation based on expected returns.3%.April 15. Commodities and Strategy Research 7 . the role of commodities as a portfolio diversifier and inflation hedge increases its attractiveness in the current environment. in our view. Goldman Sachs Global Economics. Finally. 2011 Global It is nevertheless important to emphasize that commodity returns still have upside on a 12mo horizon. we expect demand growth to continue to outpace supply growth. we believe that stock-out for copper has been deferred.0% from 14. which would be hastened should the Libyan outage persist. particularly following the correction in oil prices that we anticipate. leading to much lower inventories and OPEC spare capacity later next year. Barring further persistent increases in oil prices that damage demand. not avoided and is now likely to occur during 2Q2012.

we are becoming increasingly concerned at the potential downside risk from a sharp deterioration in demand at current price levels. Commodities and Strategy Research 8 . we are increasingly wary that with prices back at spring of 2008 levels.3% from February 28. we believe that prices have pushed ahead of where fundamentals currently suggest and that the market will likely experience a substantial correction in coming months. US motor gasoline demand has been declining counter-seasonally in recent weeks (see Exhibit 2) as prices at the pump rose to near $3. we may be beginning to see signs of the sharp drop in demand that led to prices plunging in the summer of 2008. 2011. particularly in the United States. OPEC spare capacity is significantly higher now. 2011 through March 31. +18. we see fundamental risks becoming far more symmetric in the recent environment and believe that we will likely see a continued correction in crude oil prices toward our nearterm price targets. 2011 Petroleum +6. Concerns about the further spread of protests to other oil producing countries in MENA have pushed market length to exceptionally high levels (see Energy Weekly: Prices return to spring 2008 levels. We believe that spare capacity was effectively exhausted by June 2008. 2011).3% ytd through March 31. it was near this same price level that US motor gasoline demand declined counter-seasonally in June 2008. These high price levels invite comparison to the spring of 2008. notably a shortage of light-sweet crude oil. but fundamentals not there yet. In particular. +17. 2011. while the market remains focused on the upside price risk from the potential for more supply losses. 2011 Global Energy: +6. 2011 Oil returns have led the complex as the unfolding events in MENA have pushed up Brent crude oil prices from $100/bbl in mid-February to a recent peak of over $125/bbl. Further. Interestingly.April 15. Consequently. and the oil market’s ability to weather the loss of supplies from another producer in the region is limited. when crude oil prices first breached these levels in May before peaking at over $145/bbl by early July.75/gallon.4% from February 28. While there is some similarity between now and then. we continue to believe that -. barring additional supply disruptions. global production capacity has increased more. 2011 through March 31. Although the contagion risk in MENA remains elevated. On net.the oil market has adequate inventory and OPEC spare production capacity to avoid the degree of physical tightness experienced in 2008 well into next year. we believe that there are fundamental differences between now and the spring of 2008: Inventories are still well above normal levels. while oil prices remain elevated on concerns of potential further supply losses. leaving close to 2 million barrels of OPEC spare capacity even following the loss of Libyan production. Consequently. where total petroleum inventories are still at the same levels as in 2009 / 2010.even with the loss of Libyan production -. April 13. While global demand has surpassed prerecession levels by a wide margin. Goldman Sachs Global Economics.4% ytd through March 31. barring another supply disruption.

leading to much lower inventories and OPEC spare capacity later next year. we continue to believe that US natural gas price upside is limited this year and next as the potential on the production side remains impressive.75/gallon. moderately lower than expected. especially if prices should increase towards $5. much like it did in June of 2008 Thousand b/d (left axis). particularly following the correction in oil prices that we anticipate.00 8600 1. Consequently.00 3. Going forward. 2011 through March 31. Already at current prices.00 and $4. which would be hastened should the Libyan outage persist. which will likely keep natural gas prices under pressure in order to maintain its current discount to Appalachian coal prices.00 Dec 8200 8000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2011 Demand 2008 Demand 2011 Price (right axis) 2008 Price (right axis) Source: DOE and GS Global ECS Research.50 8800 2. Commodities and Strategy Research 9 . 2011 Global Exhibit 2: US motor gasoline demand has begun to fall counter-seasonally as retail level motor gasoline prices push above $3.00/mmBtu.50 0.00 9400 9200 9000 2.50 4. -2. it continues to grow (see Exhibit 4). US production shows few signs of slowing – on the contrary. Natural Gas +4.25/MMbtu for 2011 and 2012. However.00 0. However. we expect demand growth to continue to outpace supply growth. moderating weather and still-ample inventories heading into the spring shoulder months for demand have pushed prices lower again in recent weeks (see Exhibit 3). Goldman Sachs Global Economics.50 8400 1. We expect this tightening in physical markets to support higher prices and higher commodity returns. $/gallon (right axis) 9600 5-year average demand (2003-07) 4. barring further oil supply shocks. we reiterate our average price forecasts of $4.4% from February 28. Accordingly. we continue to see a need for coal-to-gas substitution in the region of 2 Bcf/d over the coming summer to avoid breaching storage capacity.April 15.4% ytd through March 31. respectively. we emphasize that barring persistent increases in oil prices that damage demand.50 3. 2011 NYMEX natural gas performed well in March owing to a late round of winter weather that helped push end-winter US inventory levels down to 1579 bcf. 2011.

In particular. taking into account all the potential increases to US natural gas demand that could result from these shifts in generation and transportation policy. however. However. Looking beyond 2012. In addition.30 20 58. raising uncertainty regarding license renewals and new construction plans (see Natural Gas Weekly: Back-end rally to persist as nuclear concerns gain momentum. as more stringent Environmental Protection Agency regulations will likely result in the retirement of a significant portion of US coal-fired power generation capacity (see our January 31. we estimate that long-run gas consumption can be up to 20 Bcf/d higher than what trend growth in generation and industrial demand would suggest (see Exhibit 5). we believe that such a transition would take at least 20 years to complete and that its success would remain dependent on adequate infrastructure being put in place.0 52. We estimate that if the ultimate goal of the 2009 version of the bill – that 10% of total vehicle sales in the United States will be natural gas vehicles (NGVs) by 2018 – is reached. the high oil price in recent months has led to renewed momentum for policies aiming to increase the use of natural gas in the transportation sector.0 5 01/03/2011 3. weekly moving average 62. the NAT GAS Act of 2009 has re-emerged in the political discussion. Further. Specifically. as the recent events in Japan have led to renewed concerns regarding nuclear technology. the (cumulative) long-term impact on natural gas demand could be significant. March 29. Commodities and Strategy Research 10 .0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 HDDs 10y average HDDs NYMEX natural gas 2011 2010 2009 2008 Source: Earthsat.70 11/03/2011 21/03/2011 31/03/2011 10/04/2011 20/04/2011 46. Source: Bentek Energy. 2011 Global Exhibit 3: A late round of winter weather resulted in a good performance for NYMEX natural gas in March Left axis: HDDs. likely in the 11-13 Bcf/d range. On net.0 Realized 25 Forecast 60. right axis: $/mmBtu 4.50 Exhibit 4: US production continues to grow Dry production.10 15 54. 2011 Natural Gas Weekly). as we have argued in the past.April 15.90 50.0 48. 2011).0 10 3.0 4. Goldman Sachs Global ECS Research. Bcf/d. Goldman Sachs Global Economics.0 56.0 4. the Nuclear Regulatory Commission will perform a safety review of all US nuclear power plants. generation demand for natural gas is likely to rise well beyond its normal trend growth in the next eight years. several policy initiatives have generated increasingly constructive conditions for natural gas demand and prices. NYMEX.

we maintain that energy and currency-related “cost-push” developments will likely keep prices supported at historically high levels across the complex. As a result. tighter inventory management and the negative shock to supply chains resulting from the earthquake in Japan. 2011. the cyclical “breakout” that we had been expecting for copper in particular later this year is likely no longer required to balance the market. Although we continue to see a generally strong cyclical backdrop for metal demand.0% from February 28. despite relatively weak fundamental balances (see Exhibit 6). 2011 Global Exhibit 5: New policies affecting the transportation and generation sectors in the United States may potentially add 20 Bcf/d to long-term natural gas demand over the next 20 years Event NAT GAS Act Coal plant retirements Nuclear license renewals and new-builds at risk Potential impact Timing +11-13 Bcf/d +4-6 Bcf/d +3. Goldman Sachs Global Economics. not avoided. April 12.4% ytd through March 31. Commodities and Strategy Research 11 . We continue to acknowledge distinctly tighter fundamentals for copper. Nevertheless.2 Bcf/d 2018-2030 2015-2018 2011-2021 Source: Goldman Sachs Global ECS Research. 2011). the potential for a negative metals demand shock stemming from higher oil prices and increasing expectations of monetary tightening globally may also generate price headwinds.April 15. Further. we maintain that supply growth will likely outpace demand growth for most of the metals. has moderated the expected market deficit this year. pushing out the timing of a drawdown in copper inventories to critically low levels beyond 2011. the combination of Chinese consumer destocking. limiting price upside from current historically high levels. 2011 Industrial metals returns have remained lackluster in the recent period. However. Industrial Metals: -3. 2011 through March 31. in our view (see Exhibit 7 and Metals Weekly: Copper price spike likely deferred. +1.

April 15. exchange inventories (horizontal axis) 2. Goldman Sachs Global Economics.15 2. With the 10-year US TIPS yield now well-below 1.05 92 1. 2011 After dipping below $1. while 10-year US TIPS yields recovered quickly from the lows during the “flight to safety” in the bond markets following the Japanese earthquake. COMEX. Further. Net. 2011 Global Exhibit 6: Energy and currency are providing “cost-push” support to base metals prices Index (long-dated base metal index calculated by averaging 5-year forwards for Al.7 Previous Dec2011 forecast GS Dec2011 Forecast 1.9 98 96 94 1. March 17. falling below 90 bp. we maintain that Chinese end-use demand remains healthy. Source: LME. As a result. Goldman Sachs Global ECS Research.95 86 0.400 1.25 Exhibit 7: Sharp upside copper price risk deferred on lower expected inventory draws Ratio of 3-month copper prices to 5-year futures price (vertical axis).7% from February 28.5 1. SHFE.9 0.200 1. we maintain a 12-mo copper price target of $11. $/bbl right axis 1. we are also mindful of the sharp rise in longer-dated copper prices well above levels that can be explained by cost inflation or currency shifts. not avoided.800 Source: LME. GS Global ECS Research. Commodities and Strategy Research 12 . and emphasize that the critically low inventory environment has been deferred.10 1.4% ytd through March 31. driving strong precious metals returns (see Gold set to rally as events send US real interest rates lower.90 Sep-10 84 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 End 1Q2011 expected Current 1.00% over the past month. suggesting the market is still pricing trend demand destruction needed to maintain balance in the supply-constrained market. 2011 through March 31. Zn).00 90 88 0. our 2012 balance reflects a decline in exchange inventories to exceptionally low levels in 2Q2012. with 10-year US TIPS yields remaining generally below 1. we next see the gold rally continuing to our 6-month target of $1.480/toz. The gold rally continues to receive strong support from low US real interest rates.565/toz.3 1. NYMEX. We agree with this view. Accordingly.600 1. Cu. with gold approaching our nearterm price target of $1. However. 2011. supporting higher gold prices (see Exhibits 8 and 9).473/toz. +4. that consumers have been eager to step into the market on price dips and that the copper market will most likely remain in a meaningful deficit over the course of the year – all suggesting that prices are unlikely to fall significantly below the recent range on any sustainable basis. Interestingly. gold prices have recovered and rallied to new highs of $1. we would continue to expect that net speculative length on COMEX futures will rise further. Precious Metals: +3. 2011).3 104 102 1.20 100 1.000/mt.00%.7 Long dated base metal price USD Long dated oil price 0.5 -400 -200 0 200 400 600 800 1. left axis. the yields have been generally declining since then.000 1.1 1.1 0. Ni.400/toz after the Japanese earthquake.

However.6% 30 0. Frameworks: Forecasting gold as a commodity. CFTC.5% in 2011 and 1. As a result. Source: COMEX.4% 10 2.April 15. FRB. with US dollar-denominated gold prices expected to peak in 2012 when rising US real interest rates remove this fundamental support. Commodities and Strategy Research 13 .50 2. inverted) 35 0. a higher level of inflation would present upside risk to our gold price forecasts. Goldman Sachs Global ECS Research.50 1. Although our US economists note that core inflation data has been a little firmer than they expected. inverted) Source: FRB. Goldman Sachs Global Economics.3% 0. and Goldman Sachs Global ECS Research. but instead on our US economists’ forecast for US inflation to remain relatively subdued.5% 20 1.50 4. which creates upside price risk to our gold price forecast. for a given level of US real interest rates and the monetary demand for gold (see Exhibits 10 and 11). 2011).00 3.9% 25 1.00 Front-month gold price 2010 USD/toz 1832 1600 1397 1220 1066 931 813 710 620 15 5 Jan-06 Net speculative length US 10 year TIPS yield (right axis. % yield (right axis.00 1. 2011 Global Exhibit 8: US 10-year TIPS yields below 1% points to higher gold prices Million toz (left axis). March 25. Clearly. 2009).1% 2.6% in 2012.00 0.8% 2.00 2. Importantly.2% 1. they maintain their forecast for core inflation to remain around 1% as they believe that the pass-through from higher commodity prices will be limited (see US Views: Messy. We continue to view the persistently low level of US real interest rates as the primary driver of our bullish outlook for gold over the next 12 months.7% 3. Our framework for evaluating gold prices related the real (inflation-adjusted) price of gold to real interest rates and the monetary demand for gold from central banks and investors (see our report.50 3. averaging 2.0% Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Exhibit 9: Lower US real rates reinforce our constructive view on gold prices Real interest rates are the key determinant of gold prices over the medium term under stable monetary demand US 10 yr TIPS yield % per annum 0. a higher rate of inflation would inflate our forecasted gold price in proportion to the overall US Consumer Price Index (CPI). our bullish view of gold prices has not been based on the expectation of substantial inflation in the near term. they acknowledge that the risk to this inflation forecast is to the upside. April 4.

00 2.00 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 US 10-year inflation breakeven Source: FRB. we forecast higher prices in the near term.690/toz in 6. Although we expect a sequential decline in prices in 2011/12. not a long-term investment. we continue to believe that gold at current price levels is a compelling trade. Source: FRB. although we expect exceptionally high farmer margins to generate a broad supply response in 2011/12. More specifically. we believe there is upside relative to the current forward curve. we reiterate our crop outlook: We expect further tightening in the 2010/11 corn balance on continued strong feed and ethanol demand (see Exhibit 13).50 0.. Overall.50 1.00 2. Agriculture: -2. which currently stand at $1.7% from February 28.9% ytd through March 31.00 1. Commodities and Strategy Research 14 .00 Exhibit 11: … inflation breakeven has continued to widen US 10-year nominal yields minus US 10-year TIPS (%) 3. will keep crop prices elevated in the near term. we believe that further declines in old-crop inventories.April 15.50 2.50 2. As a result. if US 10-year TIPS yields rise back to their February levels of 1. especially for corn. 2011 through March 31. 2011.30% and US inflation remains subdued.50 0. we would expect a slightly slower rally in gold prices than we have currently embedded in our forecasts for the second half of 2011. 2011 Agriculture prices and returns continued to rally in the first half of April on signs of continued strong demand in the face of tight inventories. 2011 Global Exhibit 10: While US real rates have fallen below 1%.00 0. +5. While the outlook for 2010/11 soybean ending stocks continues to improve on better South American production and softer Chinese demand.50 1. While higher inflation presents an upside risk to our bullish gold price forecasts over the next 12 months. respectively.and 12-months.565/toz and $1. in light of the USDA March 31 Grain Stocks and Prospective Plantings reports and last week’s WASDE release. US 10-year TIPS yield (%) 3. Over the medium term.00 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 US 10-year TIPS Jul-10 Oct-10 Jan-11 Apr-11 0.00 1. this is counter-balanced by the risk that US real interest rates could rise more quickly than we anticipate as the economic recovery continues. we believe that the concurrent tightness across crop balances and our expectation for continued strong feed and fuel demand will limit the recovery in inventories and points to sustained elevated crop prices. Although the US Department of Agriculture continued to project a stabilization in old crop inventories in the April WASDE (see Exhibit 12). Net. we expect higher prices over Goldman Sachs Global Economics..

8 0. We see three key stages in the coming months which will drive the crop outlook and in turn crop prices: Old-crop inventory tightness still looming. NYMEX. Weather is key to the new-crop supply response. 2011 Global the next 12 months as we view soybeans as the crop most likely to remain in a deficit in 2011/12 on lower acreage.1 0. Planting is the first step of the supply response. supportive margins keep ethanol production elevated US ethanol production (kb/d. inventories remain elevated and we expect range bound prices in the near term but see upside risks to wheat prices and our forecast over the medium term on 2011/12 production risks and potentially higher feed demand. points to further declines in inventories.9 950 50% 2010/11 WASDE stocks to use ratios 0.5 0. we see the risk to prices as skewed to the upside. Goldman Sachs Global Economics. feed and ethanol. Weather this spring and summer will be the key to the next large moves in grain prices as weather is key to determining yields. as any supply disappointment will require sharply higher prices to achieve sustainable demand destruction in the face of already tight inventories. While we still expect a global supply response to push cotton prices lower over the next 12 months.2 750 10% 700 0. Goldman Sachs Global ECS Research.3 0. Acreage intentions in the US came mostly in line with our expectations with US farmers looking to increase corn and cotton acreage to the detriment of soybeans. CBOT. especially for corn and cotton. given the current tight old-crop inventories. Exhibit 12: The USDA continues to report a stabilization in old-crop inventories US and global stocks-to-use ratios 60% May September June October July November August January Exhibit 13: However. Despite the 2010/11 wheat deficit.April 15. Source: EIA. Commodities and Strategy Research 15 . rhs) US producer margin ($/gal) 1.0 Sep-09 650 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 0% US Corn World US World Wheat US World Soybeans Ethanol margin US Production of Ethanol (monthly) US Production of Ethanol (weekly) Source: USDA. Goldman Sachs Global ECS Research.0 0. strong near-term demand.4 850 30% 800 20% 0. especially for corn from exports.6 0. further tightening of the cotton old crop balances introduces upside risk to our expectation for lower prices in the near term. Planting has now effectively started and weather is now the key to achieving acreage intentions.7 900 40% 0. While the USDA continues to report stabilization in old-crop inventories at low levels. Finally.

these releases confirm our expectation for tight supplies ahead in the face of strong demand. thousand pounds) 450. the share of lightweight placement has been larger than normal. 6. Goldman Sachs Global ECS Research. This outlook leads us to expect tight livestock balances in 2011 and we forecast lean hog prices of 95. Source: USDA. On the supply side.and 12-months respectively. On net. in particular beef. On the cattle side. 2011. where the foot-and-mouth disease outbreak has led to the culling of a quarter of the pig and cattle herd. 2011 Global Livestock: 4.April 15.000 350. may start to weigh on domestic demand. livestock prices and returns eased in April on fears that high meat prices. this points to further growth in already strong import demand for US meat (see Exhibit 14).000 55% 250.000 150. 105 and 95 cents/lb in 3-.000 100.000 35% 50% 45% 40% 0 30% Jan Feb Mar 2011 Apr 2010 May Jun Median Jul Aug Sep Oct Nov Dec Japan South Korea Other countries 5-year min 5-year max Source: USDA. we still expect that demand for meat will continue to improve in 2011 as our economists forecast both stronger US economic growth. On top of this already strong foreign demand. Further. Exhibit 14: Japanese and South Korean demand will support already strong US pork exports US pork exports (carcass wt.000 60% Exhibit 15: Lightweight cattle on feed placements have increased in 2011. With Japan and South Korea among the largest importers of both US pork and beef last year.3% from February 28. 2011 After rallying strongly in March. 115. which points to continued domestic demand recovery.and 12-monthv respectively.2% ytd through March 31. which should support US exports. Although the USDA’s Hogs and Pigs report pointed to a small increase in the US hog herd.000 50. Goldman Sachs Global Economics. Goldman Sachs Global ECS Research.000 200. For live cattle. 2011 through March 31. We continue to believe that tight livestock balances in 2011 on strong demand in the face of tight supplies will continue to support prices. pointing to tighter feeder cattle supply Share of placements weighing less than 700 lbs 70% 65% 300. we expect prices of 115. and 120 cents/lb in 3-. high feed prices are weighing on margins and will likely spur farmers to limit cattle and hog herd expansion.000 400. while better deferred margins have supported placement of cattle on feed. as well strong EM GDP and income growth. Commodities and Strategy Research 16 . lightweight placements last fall and harsh weather conditions this winter have generated lower carcass weights and in turn limited beef production growth despite increased slaughter. 7. Despite high feed and in turn livestock prices. pointing to tighter feeder cattle supplies and in turn likely lower placements in months ahead (see Exhibit 15). the USDA also reported that US hog producers intend on farrowing 3% fewer sows over the next two quarters than last year. we believe that US exports will be supported in 2011 by strong import needs by both Japan – where the tsunami and possible radiation put up to 20% of domestic meat production at risk – and South Korea. 6.

the combination of Chinese consumer destocking.00/bbl RBOB Gasoline $2. UK NBP natural gas prices have performed well in recent months. Distillate margins remain relatively strong over the past weeks as the ongoing economic recovery in the United States has pushed demand above last year’s levels and diesel cracks remain supported as a significant share of Japanese refinery capacity remains offline. we maintain a 12-mo copper price target of $11. We expect this tightness to keep the market elevated in the near term. like copper. Looking at cancelled warrants in Asian LME warehouses and the continued decline in LME inventory. However. However. Gas $4. exacerbated by the earthquake-related supply disruption in ferro-nickel markets.50 p/th Industrial Metals LME Aluminum $2200/mt LME Copper $11000/mt LME Nickel $19500/mt LME Zinc $3100/mt Goldman Sachs Global Economics. we expect that any further strength in distillate margins are likely transient. we believe zinc is the metal most likely to see longer-term demand support from rebuilding efforts in Japan. Accordingly. we believe that refinery shutdowns in the midcontinent have led to a shift from pricing a discount of the US midcontinent from the global oil market to pricing a dislocation. broad nickel markets still look to be in deficit. 2011 Global Commodities in a nutshell Commodities Energy WTI Crude Oil US inventories remained at close to last year’s levels in March after having drawn sharply in 4Q2010. higher long-dated energy prices are lending support given the energyintensive nature of aluminum production and the market’s focus on longer-term “cost-push” inflation.000/mt. Although the earthquake-related events will have a clear negative impact on aluminum demand in Japan and more globally. Moreover. we see limited upside from current levels. generating “demand-pull” support for the metal and keeping prices elevated above 9. However. We therefore believe that any upside to prices will be limited by potential supply responses and we maintain a bearish stance for this summer. Consequently. pushing out the timing of a drawdown in copper inventories to critically low levels beyond 2011. such as Brent and Light Sweet Louisiana (LLS). While Cushing inventories have in fact reached new highs. in our view.50/mmBtu (2012) forecasts and may move forward the sustainable reconnection with oil-indexed prices we currently have penciled in for 2H2012. we continue to view a containment of the threat to oil production from the political unrest in the MENA region as the primary downside risk to crude oil prices in the near term. we believe this tightening will have a limited impact as the market is currently well supplied. the recent energy and currency developments should provide “costpush” support to the metal. we continue to expect that WTI-Brent will move back to near $7/bbl in the near term. however. reiterating our average 2011 price forecast of $4. the US oil market itself has become increasingly fragmented by the high and rising level of oil inventories in the midcontinent. WTI has been trading at a significant discount to other light sweet crudes. Consequently. the dislocation has once again shifted back to a discount over the past weeks. we maintain that medium-term price risk is skewed to the downside from current levels. as growing nickel pig iron and ferro-nickel supplies should alleviate current tightness in Asia. our 2012 balance reflects a decline in exchange inventories to exceptionally low levels in 2Q2012. As a result.WTI spreads peaking at to close to $20/bbl by midFebruary. not avoided. $103. gasoline margins look much weaker compared to other crudes such as LLS.April 15.50/bbl Recent events/outlook and key issues 12-m price forecasts Brent Crude Oil $107. in turn.25/mmBtu UK NBP Nat. as US distillate stocks still remain well above normal and even last year’s levels. we continue to believe that upside is limited given ample refinery capacity in the system. the fact that it took two months to get to these levels has somewhat eased concerns that with the opening of the extension of the Keystone pipeline to Cushing. however. However. and. has moderated the expected market deficit this year.000/mt. Nevertheless. However. consistent with our current price forecasts. any further supply shortfall still holds the potential for significant upside spikes in oil prices. NYMEX natural gas prices are back down to around $4. posing upside risk to our near-term forecasts. The underlying balance remains in a surplus driven by continued growth in shale gas production. notably the continued disruptions in Canada and Western Australia. the cyclical “breakout” that we had been expecting for copper in particular later this year is likely no longer required to balance the market. we believe recent developments create downside risk to our view of a cyclically tight zinc market by the end of 2011. However. this is mainly the result of depressed WTI prices as demand remains seasonally weak. However. We believe that a short-term tightening impact from Japan and likely return of Chinese buying (where there are already early signs of Asian markets tightening) will reinforce this focus. we maintain that the market will most likely remain in a meaningful deficit over the course of the year and that the critically low inventory environment has been deferred.00/gal NYMEX Nat. These recent events pose significant upside risk to our $7/mmBtu (2011) and $8. we remain constructive as nuclear safety concerns in the wake of the Japanese earthquake and tsunami as well as policy initiatives aiming to increase natural gas usage in the US transportation sector further increase the positive outlook for natural gas demand already created by the coal plant retirements we expect in the coming years. Consequently.79/gal USGC Heating Oil $3. While US gasoline margins look currently strong.00/mmBtu. even though current WTI – Brent spreads remain well above our short-term forecast. the mid-continent would be instantly a washed in crude. Brent crude oil prices have breached $125/bbl for the first time since 2008 as global inventories continued to decline. as we estimate effective OPEC spare capacity at below 2 million b/d. increasing long-term demand growth against limited structural supply growth. Further. as weather-related price strength over the first half of the winter was accentuated by the events in the MENA region and Japan. While we expect US gasoline demand to strengthen as the recovery in the US economy accelerates in 2011. However. Commodities and Strategy Research 17 . it will likely not be alleviated by the ongoing recovery in US demand and will require a redirection of pipeline infrastructure to carry crude from the US midcontinent to the US Gulf Coast to correct it and hence WTI prices will trade at a discount to Brent and LLS for longer. the market has continued to focus on anticipated deficits given strong expected global economic growth against limited supply growth. presenting moderate upside to our forecasts. Although the recent tighter fundamentals suggest a risk of lower inventory build over the course of 2011. As a result. Gas 44. As the surplus of oil in the US mid-continent is not being driven by weak US demand. However. we believe that the recent events in the Middle East and Africa have pushed prices ahead of where fundamentals currently suggest. Going forward. with Brent . As a result. as the winter is over and the market seems unconcerned by the lower-than-expected end-of-winter inventory level. aluminum prices will likely remain supported in the near-to-medium term on new challenges to the long-term energy crisis developing globally. particularly in the aluminum-intensive auto sector. and refined nickel and specialty shape product still remains unusually tight from numerous supply-side disruptions in recent months. We expect that WTI will remain volatile and prone to dislocations in the future until the pipeline infrastructure is improved. Although copper fundamentals have softened in the recent period owing largely to Chinese destocking motivated by high prices and low credit availability. more clarity is still needed concerning what incremental global LNG demand will be sustainable in the long run. Thus. The nickel market remains focused on near-term physical tightness. Longer term. Although Japanese disruptions are likely to tighten the near-term spot market. we expect that strong export demand from Latin America and Europe for US distillates will keep heating oil margins supported. These factors suggest modest upside to near-to-medium term zinc prices from current levels. while the Japan events will just exacerbate the current and expected aluminum market surplus. tighter inventory management and the negative shock to supply chains resulting from the earthquake in Japan. our late-2011 price forecasts.00/mmBtu. and refined production growth is still expected to accelerate as we move further into 2011.

pointing to potentially larger exports from Brazil. Live cattle prices remain near their highs on prospect for strong export demand. But risks remain high for new crop production. 2011 Global Commodities Precious Metals London Gold Recent events/outlook and key issues 12-m price forecasts $1690/toz With the US Federal Reserve conducting a second round of quantitative easing and likely keeping its short-term nominal interest rate target near zero through 2011. Soybean prices have declined over the past month on the prospect for a looser 2010/11 global balance as better weather in South America has improved the region’s production outlook while Chinese imports have recently been soft. Unica now projects sugar output from the Center/South region up from 2010/11. Over the medium term. we expect US real interest rates to begin to rise into 2012. respectively. we are lowering our 3-mo price target to 25 c/lb from 30 c/lb previously. we believe that any weather disappointment will likely push prices higher to generate the demand destruction that critically low inventories will require. we expect the combination of high feed prices and strong exports to limit any significant cattle herd expansion. Further.690/toz in 6. We maintain our 12-mo price forecast of 175 c/lb. the largest producer.700/mt price forecast in the near term. which currently stand at $1. With demand expected to continue to grow. While low inventories in importing countries should keep demand strong. Cocoa prices stabilized over the past few weeks as signs of a resolution to Ivory Coast’s presidential dispute were offset by concerns that logistical issues would persist. led by emerging markets. Specifically. London Silver $28. Barring weather shocks. our silver forecast reflects the historical ratio to gold. This supply response under average weather conditions during the 2011/12 crop year should push prices lower and we maintain our 12-mo 125c/lb forecast although acknowledge that risks are skewed to the upside on any weather disappointment.and 12-months. In the short term.April 15. India and China.480/toz forecast.and 6-mo price forecasts from 200 c/lb and 175 c/lb to 235 c/lb and 200 c/lb.700/mt from $2.and 12-mo price forecasts to $2. Commodities and Strategy Research 18 . likely causing gold prices to peak. we would expect a slightly slower gold rally than currently imbedded in our forecast for the second half of 2011. We are therefore raising our 3. We remain constructive on a 12-mo horizon for lean hog prices. We expect domestic and foreign demand for pork will continue to improve against a back-drop of tight supplies as we expect higher feed prices to limit herd expansion. we expect cocoa prices to continue to trade at a premium to our 3mo $2. fading uncertainty about 2010/11 crop production and prospects for a large 2011/12 crop in Brazil. We expect further drawdown in old-crop inventories will push corn prices higher. with the current round of QE set to end in June 2011. as the situation normalizes we believe that prices will decline given this year’s large West African production which points to a market in surplus for the 2010/11 crop year and a global stocks-touse ratio back to its highest level since 2005. this recent underperformance vs. As a result. we expect prices will remain elevated given critically tight US and global inventories as strong EM demand has put the market in a deficit for the fourth consecutive year in 2010/11 despite the large production rebound. reports of continued unrest in the country and the prolonged closure of banks and ports will likely delay the resumption of cocoa exports in coming weeks. Sugar prices continued to decline in April. combined with continued goldETF and Central Bank buying will continue to provide support for gold prices 2011. on signs for a record large 2010/11 output from Thailand and an improving outlook for 2011/12 production in Brazil. the ICO lowered its Indonesia production forecast and warned of potentially lower East Africa production.and 12-mo prices of 20c/lb. As focus shifts to the new crop. However. ethanol and export demand. Specifically. pointing to an only modest build on already very low Arabica inventories. we expect corn to win this spring’s acreage battle. poor infrastructure and political instability have curbed production and investment over the past few years. in the face of strong demand. Over the medium term. As a result. we are raising our 6. we expect that average weather conditions will only generate a modest build in inventories and in turn only a moderate decline in prices.400/mt previously. Over the medium term. will limit price upside in the near term. we expect a continued global production response to current elevated prices under average weather conditions and we see downside to current prices and forecast 6. In the near term. with dry conditions in the US plains and low planting last fall in Russia putting the winter wheat production at risk. Over the most recent period. we expect the low US real interest environment. and our US economics team now forecasting strong US economic growth in 2011 and 2012. In particular. And while higher placement of cattle on feed point to higher supplies in early 2011. This suggests a likely soybean deficit in the 2011/12 crop year and we forecast higher soybean prices over the next 12 months.3%. Specifically. especially from Japan. silver prices tend to track gold prices. We expect a balanced wheat market in 2011/12 with still-elevated inventory levels and slightly lower wheat prices. Corn prices were supported over the recent period by continued signs of strong feed.565/toz and $1. In turn. as demand continues to grow. After trending lower in March. Wheat prices were mostly range-bound with expectations for stronger feed demand offsetting larger global inventories reported by the USDA in the April WASDE. the ongoing events in MENA and Japan should provide further support to gold prices and we reiterate our 3-mo $1. especially from Japan. a return to neutral weather conditions suggests that 2011/12 production will not be as large as the current crop. The ICO at the same time increased its estimate for 2010/11 consumption. coffee prices rebounded sharply in April on signs that the La Niña weather pattern had a larger impact than previously expected. while the arrest of Laurent Gbagbo may signal the end of the political conflict. the outlook for lower 2011/12 production on Brazil’s off year of the Arabica plant two-year cycle will likely support prices in 2011. Over the long run. We expect this fundamental outlook to support live cattle prices at higher levels. while La Niña was beneficial to West Africa production. In light of these challenges.2/toz 700 c/bu Agriculture CBOT Corn CBOT Soybean 1575 c/bu CBOT Wheat 750 c/bu NYBOT Cotton 125 c/lb NYBOT Coffee 175 c/lb NYBOT Cocoa $2700/mt NYBOT Sugar 20 c/lb CME Live Cattle 120 c/lb CME Lean Hog 95 c/lb Goldman Sachs Global Economics. However. corn and cotton has increased the likelihood that soybeans will lose acreage in the Northern Hemisphere this spring. expectations for a supply response in 2011/12 and signs of potential demand destruction helped offset the price impact of the lower US and global stocks-to-use ratios reported in the April WASDE. elevated margins offered by new crop cotton prices will incentivize higher cotton acreage in both the US. We further expect that low ethanol inventories in Brazil will incentivize sugar mills to shift back to producing more ethanol in the short term and in turn limit near-term downside to sugar prices. However. Cotton prices have remained elevated and range-bound since mid-February. the production outlook for the Ivory Coast will remain key as aging orchards. the three largest producers. Should real rates return to their February levels of 1. Lean hog prices remained near their highs over the past month given the prospect for strong export demand. Thus. we expect prices to decline over the longer term on an expected supply response to the current higher coffee prices but acknowledge that higher cost of production in Brazil in particular will likely limit the downside to prices.

00 270.00 97.00 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs.00 230.00 Exhibit 19: NYMEX heating oil forward curves Cents per gallon 350. Source: Goldman Sachs.00 6. 2011 Global Exhibit 16: NYMEX WTI forward curves $/bbl 112.April 15.00 330.00 310.00 102.00 290.00 600.50 May-10 Aug-10 Nov-10 5.00 82.00 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 75.00 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 190.00 115.00 850.00 750. Source: Goldman Sachs.00 190. Source: Goldman Sachs.00 95.00 5.00 800.00 230.00 120.00 900. Goldman Sachs Global Economics.00 110. Commodities and Strategy Research 19 .00 4.00 90.00 250.00 210.00 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 3.00 80.00 87. Exhibit 18: NYMEX gasoline forward curves Cents per gallon 350.00 107.00 210.00 330.00 700.00 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs.00 6. Exhibit 20: IPE gasoil forward curves $/mt 1100.00 270.50 1000.50 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs.00 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 92.00 Exhibit 17: IPE Brent forward curves $/bbl 130.00 650.00 310.00 100.00 77.00 950.00 1050.00 290.00 250.00 125.50 4.00 105.00 85.00 Exhibit 21: NYMEX natural gas forward curves $/mmBtu 7.

000 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 2200 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs. Source: Goldman Sachs.000 2300 23.400 2. Commodities and Strategy Research 20 . Source: Goldman Sachs.500 2450 25.300 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Exhibit 23: LME copper forward curves $/mt 10.800 2.500 Exhibit 25: LME zinc forward curves $/mt 2550 26.April 15.750 2.500 2.000 9.450 2. Exhibit 26: COMEX gold forward curves $/oz 1550 1500 1450 1400 1350 1300 1250 Exhibit 27: COMEX silver forward curves Cents/oz 4400 3900 3400 2900 2400 1200 1150 1100 1050 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 1900 1400 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs. Exhibit 24: LME nickel forward curves $/mt 26.500 7.500 2350 24.500 9.600 2.550 2.500 8.000 2400 24.000 8.700 2.650 2. Goldman Sachs Global Economics.500 2250 23.000 2500 25. Source: Goldman Sachs.000 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs. 2011 Global Exhibit 22: LME aluminum forward curves $/mt 2.350 2.000 7.

April 15. Exhibit 32: CME live cattle forward curves Cents/lb 130 125 120 115 110 105 100 95 90 85 80 Jun-10 Exhibit 33: CME lean hog forward curves Cents/lb 110 105 100 95 90 85 80 75 70 65 60 May-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs. Source: Goldman Sachs. Commodities and Strategy Research 21 . 2011 Global Exhibit 28: CBOT wheat forward curves Cents/bushel 925 875 825 775 725 675 625 575 525 475 425 May-10 Exhibit 29: CBOT corn forward curves Cents/bushel 800 750 700 650 600 550 500 450 400 350 300 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs. Goldman Sachs Global Economics. Source: Goldman Sachs. Source: Goldman Sachs. Exhibit 30: CBOT soybean forward curves Cents/bushel 1450 Exhibit 31: NYBOT cotton forward curves Cents/lb 215 195 1350 175 1250 155 1150 135 115 1050 95 950 75 850 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 55 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 13Apr11 14Mar11 13Apr10 13Apr11 14Mar11 13Apr10 Source: Goldman Sachs.

5 50.2 3.6 -5.5 13.4 4.8 1882.4 -4.9 23.6 509.4 77.9 7.8 94.7 4.4 19.6 23.7 136.9 422.6 7.0 -9.3 Source: Goldman Sachs Global ECS Research.79 Dec-86 Jan-99 Dec-87 Dec-82 Jan-99 Dec-93 Dec-90 Dec-76 Jan-95 Dec-92 Dec-90 Dec-77 Dec-72 Dec-69 Jan-99 Dec-69 Dec-69 Dec-76 Dec-72 Dec-80 Dec-83 Dec-69 Jan-02 Dec-75 2138.0 2009 21.7 13.00 65.4 4.4 -3.7 6.4 55.2 22.4 -35.7 31.3 13.7 1.7 1.0 234.9 6.3 10.1 38.4 379.0 16.4 20.5 12.0 -3.4 27.5 -4.3 18.9 27.3 9.6 103.3 28.5 299.0 12.49 0.5 5.1 4.2 22.1 17.0 5.0 70.7 3.3 5.06 1.7 4.5 16.23 4.5 9.7 18.4 -23.18 57.1 22.0 20.9 -2.78 Base Date 31-Mar-11 = 100 Level Dec-69 Dec-82 Dec-82 Dec-76 Dec-72 Dec-69 Dec-69 805.2 -2. 31. 2011.7 25.8 75.9 -22.9 23.9 82.6 -0.7 18.0 -9.56 3.9 9.7 16.3 S&P GSCI Enhanced Index Energy Petroleum Industrial Metals Precious Metals Agricultural Livestock Commodities Energy WTI Brent Unlead/RBOB Gas Heating Oil Gasoil Natural Gas Industrial Metals Aluminum Copper Lead Nickel Zinc Precious Metals Gold Silver Agriculture CBOT Wheat KBOT Wheat Corn Soybeans Cotton Sugar Coffee Cocoa Livestock Live Cattle Feeder Cattle Lean Hogs Note: As of March 31.7 19.3 9.4 119.0 23.5 -34.8 -20.7 -0.2 41.3 31.8 1189.0 28.80 5.0 -3.4 19.4 -0.2 19.19 1.44 7.4 27.4 9.2 28.9 7.4 5.3 172. Commodities and Strategy Research 22 .82 18.3 47.3 -9.58 2.April 15.5 Total Returns (%) 1-Month 3-Month 12-Month 2010 2011 YTD Change Change Change 12.1 1374.6 215.4 9.2 86.93 3.0 13.6 19. Goldman Sachs Global Economics.7 -2.4 1.43 3.69 3.4 33.39 4.5 34.29 0.0 3.3 32.1 7.4 5.5 23.4 5.1 -4. 2011 Global Exhibit 34: Performance of S&P GSCI Enhanced Commodity Index and Strategies through March 31.4 -0.5 0.8 82.2 71.84 0.6 -3.9 32.5 72.7 2.1 420.0 5.7 90.9 309.63 1.20 1.9 26.3 31.3 6.3 19.9 33.2 -2.8 19.0 156.0 47.3 114.0 -21.8 2032.4 148.5 13.7 1680.33 5.1 3.9 -2.4 -4.5 33.85 2.4 214.0 6.4 776.6 -0.0 158.7 85.3 132.4 802.9 5.9 -2.6 163.5 32.4 -4.5 20.3 4.1 22.6 77.7 11.0 6.8 115.0 -4.7 -12.0 23.8 -24.8 5.9 9.4 5.5 9.4 4.3 18.7 19.33 6.90 0.2 41.6 5.6 -11.9 9.82 4.5 122.6 23.8 7.4 9.33 0.4 3.3 98.9 2001.0 -6.4 1.9 37.4 1.3 9.5 212.4 20.1 4.8 31.7 -7.9 -9.2 5.68 0.0 -10.1 17.6 -5.45 3.8 5.36 0.5 67.6 671.9 5.5 15.98 12.2 41.7 29. 2011 Index and strategies Dollar Weight 100.2 3.0 34.1 22.

64) 1.51) 1.61 43.23) 9.67 10.07) 2.76 75. 2011 Global Exhibit 35: Performance of equity and bond total returns indices through March 31.27) (1.56 28.13 4.172 4.34 2.350 4.08 12.11) 1.64 12.14 57.51 10.84 2.75 5.06 15.79 32.88 7.20 4.21 (3.77 10.39 4.07) 0.07 19.14 4.63) 2.50 0.03 2.54 (0.15 3.42 14.85) (0.59 1.632 3.21) 6.80 10.90 13. 2011.17 (6.15 3.39 3.42 6.46 59.56 1.30 15.46 5.63 72.03 23.14 13.38 0.56 16.73 (4.92) (1.15 2.80 1.95 9.83 (2.59 23.64 25.76) 15.91 3.897 7.25 (8.056 6.66 4.06 24.412 41.51 10.36 33.63 14.53 4.55 5.83) 5.919 102 638 27.77 (1.12) 14.53 9.17 (21.83 4.69 4.41) 14.54 22.37 6.83 (2.79 (4.45 6.670 6.53 4.57 13.15 5.90 (1.203 1.76 0.91 3.30 0.39 60.15 2.41) (0.16 4.191 926 925 (4.92 7.47 878 199 858 2.15) (0.58 7.73 (4.34 8.10 6.468 26.499 1.211 14.32 (14.041 1.51 5.906 6.54 13.71 5.51 10.35 4.62 3.39 4.27 17.93 7.46 5.80 15.24) 2.07 4.72 (0.26 26.893 7.84 16.13) 0.80 10.84 (0.41 30.57 76.51 688 1.05 5.13) 12.57 0.62 3.23 22.119 1.44 14.93 7.77 10.82 22.33 20.46 38.63) 2.14) 2.58 31.18 5.14 (0.15 74.69 4.00 62. 2009 2010 2011ytd 2.19 (5.30 5.58 7.97 (2.60 19.08 0.75 0.08 9.57 13.88) (1.15) 4.54 13.04 0.46 5.51) 0.34 1.93 8.06 16.87 3.99) 1.04 45.67 27.07 2.05 (1.129 10.103 49.488 1.72 56.29 13.24) 2.91) 0.16 1.48 (0.00 2.08 14. Goldman Sachs Global Economics.81 18.77 6.91 3.99 3.52 20.76) 1.105 35.03 10.52 15.37) (7.16 11.08 2.16 Source: Goldman Sachs Global ECS Research.02 13.239 38.501 5.96 7.50 79.911 1.72 7.21 5.08 9.38 14.83 27.86 8.77 4.23) 1.07 26.14 (0.29 15.87 10.936 10.80 1.55) (8.79 (4.88 7.03 43.05 6. Commodities and Strategy Research 23 .20 0.85) (0.53 2.90 8.23 4.10 3.45 21.96 7.92 7.11 0.11 0.636 5.41) (0.09 0.42 (0. 2011 Total Returns in USD (%) 31-Mar-11 Level 1-Month 3-Month 12-Month Change Change Change Indices Equity Indices (Quoted) US S&P 500 Canada S&P/TSX Composite UK FTSE 100 France CAC 40 Germany DAX Japan Topix HK/China Hang Seng Australia S&P ASX 200 Singapore STI MSCI Equity Indices Region (USD) All Country World Index The World Index (DM) EAFE Europe Emerging Markets (EM) Country (USD) USA Canada France Germany Italy Netherlands Spain Switzerland United Kingdom Japan Hong Kong Singapore China Korea Citigroup World Government Bond Indices (USD) Region World European Union G7 Country USA Canada United Kingdom France Germany Italy Netherlands Switzerland Japan Note: As of March 31.14 4.99 3.77 6.00 43.10 0.80 571 4.46 (0.April 15.76 24.227 1.18) (1.366 35.21 12.10 11.406 832 2.434 3.76 0.22 5.45 6.84 2.98) 8.01 31.91 3.

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