Risk assets and commodities have "not fully priced in recession risks." Goldman Sachs: Hedge against recession, recommend going long on gold and short on oil!

Author of this article: Bu Shuqing

As the trade war releases more and more signals of easing, global stock markets have welcomed a significant rebound, with the S&P 500 index rising for eight consecutive days. However, Goldman Sachs believes that there remains significant uncertainty surrounding Trump’s policies, and risk assets have greatly underestimated the risk of a U.S. economic recession. Traditional safe assets such as U.S. Treasuries and the U.S. dollar may continue to decline, while gold and oil put options are expected to become the best hedging tools.

According to news from the trading desk, Goldman Sachs predicts that in a recession scenario, gold prices could rise to $3,880 per ounce by the end of the year, while Brent crude oil may fall to $53 per barrel. Equally important is the "4D structural trend"—de-dollarization, increased defense spending, energy de-risking, and insufficient copper mine investment—which will be long-term favorable for gold and copper.

Recession Risks Underestimated, Traditional Hedging Methods May Fail

Although the latest economic data appears robust and commodity demand is performing well, Goldman Sachs warns that the probability of the U.S. economy falling into recession in the next 12 months is as high as 45%. This judgment is based on several key factors:

Trump's Policies: The policy uncertainty index has surged from a long-term average of 108 to a recent high.

Corporate Confidence Hit: Surveys from the Philadelphia Fed for services and manufacturing, as well as the New York Fed survey, show that the proportion of respondents expecting a decline in economic activity is nearing historical highs.

Others: Real income growth may slow, financial conditions remain tight, and risks of production disruptions in the U.S. persist.

Goldman Sachs estimates that if a full-blown recession occurs, the S&P 500 index could fall to 4,600 points (17.9% lower than Thursday's closing price), and the U.S. high-yield credit spread will widen to 788 basis points, with short-term yields dropping below 3%.

More concerning is that Goldman Sachs strategists point out that traditional portfolio hedging tools—long-term U.S. Treasuries and the U.S. dollar—may continue to fail to effectively hedge against stock risks.

Recent unusual "emerging market-style correlations" (stocks down/yields up/U.S. dollar down) clearly indicate that the market is worried about the impact of recent policy actions on U.S. governance and institutional credibility.

Gold—The Best Hedge Against Recession

Goldman Sachs believes that concerns over U.S. governance and institutional credibility, risk aversion, and larger rate cuts by the Federal Reserve may push gold prices far above its already bullish baseline scenario ($3,700 per ounce by the end of 2025, $4,000 per ounce by mid-2026).

In a recession scenario, due to accelerated ETF inflows, Goldman Sachs estimates that gold prices will reach $3,880 per ounce by the end of the year. In extreme scenarios, if market concerns about the subordination risk of Federal Reserve policies or changes in U.S. reserve policies intensify, gold prices could even reach $4,500 per ounce by the end of 2025.

A key driver of the significant rise in gold prices is the substantial increase in gold purchases by central banks in recent years. Since Russia's foreign exchange reserves were frozen in 2022, several countries have begun diversifying to reduce their dollar reserves, leading to a fivefold increase in central bank gold purchases since then The shift in asset allocation by private investors may be the key to the next leap in gold prices. Data shows that global gold ETF holdings account for only 1% of the U.S. Treasury market size and 0.5% of the total market capitalization of the S&P 500. This means that even if investors only shift a small portion of their funds from U.S. fixed income or risk assets to gold, it could have a significant impact on the relatively smaller gold market.

Oil Put Options - Quality Protection in a Recession Scenario

Although under Goldman Sachs' baseline scenario, Brent/WTI oil prices are expected to decline only slightly (averaging $63/$59 for the remainder of 2025 and $58/$55 for 2026), oil put options remain a quality hedging tool against recession.

The report points out that compared to global growth and slowing oil demand, oil prices may experience a larger decline in the next recession, as OPEC's supply cuts may be smaller than the median peak-to-trough decline of 2.7 million barrels per day during the last three recessions. This is mainly due to OPEC currently having higher spare capacity.

In the baseline scenario (OPEC cancels the 0.7 million barrels per day cut plan), Goldman Sachs estimates that the average price of Brent crude oil in the U.S. recession scenario for 2026 will be $53 per barrel, and $47 per barrel in the global economic slowdown scenario. If OPEC completely cancels the 2.2 million barrels per day cut and the global economy slows down, Brent crude oil prices could fall below $40 per barrel in the second half of 2026.

As of the time of writing, Brent crude is priced at $62.18 per barrel, up 0.11% for the day.

"4D Structural Trends," Long-term Bullish for Gold and Copper

Goldman Sachs believes that beyond the cyclical weakness of 2025, the market should focus on "4D structural trends," which will further enhance the attractiveness of gold and copper as long-term investments:

De-dollarization: The U.S. dollar remains significantly overvalued but has begun to depreciate. Goldman Sachs expects that tariffs and other shifts in U.S. policy may lead to a slowdown in U.S. corporate profits and real household income growth, U.S. assets no longer performing exceptionally well, and a lasting desire to reduce dollar allocations in private portfolios.

Increased Defense Spending: Europe is undergoing large-scale military construction to support Ukraine and enhance security independence. Goldman Sachs estimates that Europe will increase military spending from 2% to 3% of GDP over the next five years. According to Goldman Sachs, the U.S. defense sector accounts for about 5% of U.S. demand for copper, aluminum, and zinc, and 13% of nickel demand.

Energy De-risking: As the U.S. positions oil and gas exports as bargaining chips and sources of geopolitical leverage, other countries may seek energy security more aggressively, including through electrification, as renewable energy and coal are often more readily available domestically than oil and gas in many economies. Goldman Sachs estimates that electrification will increase the annual growth rate of global copper demand by about 2 percentage points during the 2024-2030 period Insufficient Copper Mine Investment: After years of low investment, the particularly weak start of mining supply in South America supports Goldman Sachs' view that copper prices could recover (assuming no recession) to USD 10,600 per ton by December 2026, which is the level needed to incentivize investment in Chile's brownfields. In a recession scenario, Goldman Sachs estimates that copper prices could fall below the cost support level of USD 7,500 per ton by 10%, reaching USD 6,750 per ton, consistent with the lows reached during previous major economic downturns