In early 2026, commodities have maintained their strength amid high volatility, with Goldman Sachs suggesting that asset allocation is becoming a dominant variable in commodity pricing.

According to Goldman Sachs' latest research report, the core driver of this market rally differs significantly from the narratives of "tight supply-demand balance" or "cyclical recovery" seen over the past decade. Instead, it resembles a "hard asset rotation" stemming from global investment portfolios.

The firm argues that active capital inflows into hard assets alone are sufficient to significantly drive up commodity prices in the short term, potentially keeping prices elevated above levels justified by physical fundamentals for an extended period. This indicates that the pricing logic of commodity markets is shifting from "spot supply and demand" to "asset allocation shocks."

Goldman Sachs notes that the strong performance of commodity markets in early 2026 is increasingly difficult to explain using traditional supply-demand logic alone. In discussions with institutional clients, the firm observed that more capital is reevaluating asset allocations based on three primary concerns: macroeconomic policy uncertainty, the return of geopolitical risk premiums, and long-term anxiety about inflation and currency purchasing power.

Against this backdrop, investors are shifting from "soft assets" such as bonds and low-tangible-asset equities toward "hard assets" with physical attributes, which historically offer better defense in high-inflation and uncertain environments. Commodities represent the most direct and liquid expression of this shift.

Goldman Sachs emphasizes that this process is not a short-term trading phenomenon but a structural change in asset allocation frameworks. Once allocation behavior becomes the dominant theme, commodity prices may decouple from short-term fundamentals for a prolonged period.

Why can investor allocations significantly drive commodity prices? Goldman Sachs' first key explanation is that the commodity market is "too small." Compared to equity and bond markets, the size of commodity markets is extremely limited. The report highlights that, measured by open interest, the global copper market is only a fraction of the size of the U.S. private-sector Treasury market.

Given this market structure, even relatively modest inflows from asset allocation can cause significant price impacts in the short term. Goldman Sachs further distinguishes between two types of investors: active investors (hedge funds, CTAs, and tactical funds) and passive investors (index funds, pensions, and other long-term capital).

The firm's analysis shows that price movements are primarily driven by active investors' position adjustments. When these investors collectively increase their exposure, futures prices rise rapidly, subsequently influencing spot markets through arbitrage, inventory behavior, and production decisions.

Goldman Sachs states that as long as financial flows substantially exceed industrial hedging and physical flows, short-term price increases are almost inevitable.

Why does the "hard asset rotation" favor metals over energy? Among all commodities, Goldman Sachs believes precious metals and copper are the primary beneficiaries of this rotation, while energy may only see temporary gains. This is due to three structural differences.

First, market size disparities. Aside from gold, markets for metals like silver, platinum, and palladium are extremely small, making them highly sensitive to marginal capital inflows. This explains why these metals have exhibited higher volatility and stronger gains than energy since 2025.

Second, differing supply response speeds. Rising energy prices often quickly stimulate short-cycle supply, such as shale oil, limiting further price increases. In contrast, copper and precious metals supply is highly inelastic. Goldman Sachs notes that copper mines take an average of 17 years from discovery to production, and precious metals supply is similarly price-insensitive.

Third, storage and futures structure differences. Energy commodities are more prone to hitting storage limits. Once inventories accumulate, futures curves can shift into deep contango, eroding investment returns. In contrast, easily storable metals face lower roll costs, and precious metals can even avoid roll losses entirely through physical ETFs.

These factors make metals more attractive and sustainable than energy under an asset allocation framework.

Goldman Sachs views gold as the purest expression of hard asset allocation among commodities. Its supply grows slowly, is largely price-inelastic, and above-ground stocks far exceed annual production, making it a natural hedge against policy uncertainty and currency risk.

The firm's baseline forecast for gold is $5,400 per ounce by December 2026, with the main upside risk being further private-sector allocations. Its estimates suggest that a 1-basis-point increase in gold's allocation within U.S. financial portfolios could raise gold prices by about 1.5%. Given that gold ETFs currently account for only about 0.2% of U.S. private financial assets, Goldman Sachs believes there is significant room for further allocation, potentially accompanied by increased options trading amplifying volatility.

For copper, Goldman Sachs maintains a long-term bullish stance (targeting $15,000 per ton by 2035) but is more cautious in the near term. The firm believes current copper prices already exceed fair value based on inventories and demand, projecting a potential pullback to $11,200 per ton in Q4 2026. However, if the hard asset rotation continues, coupled with strategic stockpiling by nations, copper prices could still see significant upside.

In contrast, Goldman Sachs is more conservative on crude oil. While allocation flows and geopolitical risks may temporarily push oil prices higher, faster supply responses and fragile inventory structures make energy a less ideal long-term vehicle in this hard asset rotation.

Goldman Sachs concludes that asset allocation-driven hard asset rotation may keep certain metal prices elevated above physically justified levels for an extended period. The firm observes this trend already in copper markets, with precious metals likely to follow.

This implies that analyzing the current commodity rally solely through a supply-demand lens may underestimate the dominant role of financial capital in pricing. What is truly transforming commodity markets is not just supply and demand, but a deeper shift in global asset allocation.