21000080 goldman sachs research commodity watch

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October 12, 2009 Commodities: Commodity Watch

Goldman Sachs Global Economics, Commodities and Strategy Research 1

October 12, 2009

Commodities

Commodity Watch

Patiently waiting for upside

We are maintaining our 12-month forecast for the S&P GSCI

Enhanced Total Return Index at 17.5% and our

recommendation for an overweight allocation to

commodities.

Focus on uneven DM recovery exacerbates uncertainty

Commodity returns have remained relatively flat over the last month with

the exception of gold, consistent with a macro economy just beginning topush off the trough, leading to volatile economic and commodity demand

data and a lack of clear direction in the commodity markets. This has been

particularly the case as signs that developed economies have troughed

have led to a renewed focus on the recovery in developed markets, which

has been very fragile and uneven across countries and sectors in contrast

to a clear uptrend in emerging market growth since early this year. As was

the case in 1Q09, the rising uncertainty has led gold to outperform.

Commodity fundamentals remain in line with coincidental data

The lack of a clear trend in the economic and commodity data has created

impatience for evidence of improving commodity fundamentals,

particularly as equity markets have continued to price in positive leadingindicators. However, commodity fundamentals remain generally

consistent with the coincidental economic indicators that remain much

weaker and more volatile than the positive leading indicators driving the

more anticipatory financial markets. We continue to expect this volatility in

the coincidental data to persist until the commodity markets emerge from

the weak shoulder period in demand and the economic recovery gains

more solid footing.

Economic and commodity data suggest gains lie ahead

It is important to emphasize that our forecasts embed only moderate

improvements in commodity demand heading into the end of the year,

and both economic and commodity data continue to suggest that suchimprovements lie ahead. We continue to expect gains to be centered in

energy although also expect substantial upside in certain metals such as

copper. We maintain our view that gains will remain limited in agriculture

with the exception of corn.

Allison Nathan

(212) 357-7504 | [email protected]

Goldman, Sachs & Co.

Jeffrey Currie

+44(20)7774-6112 | [email protected]

Goldman Sachs International

Janet Kong

+852-2978-6128 | [email protected]

Goldman Sachs (Asia) L.L.C.

David Greely

(212) 902-2850 | [email protected]

Goldman, Sachs & Co.

Samantha Dart+44(20)7552-9350 | [email protected]


Damien Courvalin

+44(20)7051-4092 | [email protected]


The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should beaware 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 singlefactor in making their investment decision. For important disclosures, see the text preceding the disclosures or go towww.gs.com/research/hedge.html.

The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research


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Current trading recommendations

Long Copper timespread

Buy December 2010 Copper September 8, 2009 - Metals $112/mt $78/mt ($34/mt)

Sell December 2011 Copper

Long Heating Oil, short Fuel Oil

Buy 1Q2010 USGC Heating Oil July 15, 2009 - Commodity Watch $15.97/bbl $14.66/bbl ($1.31/bbl)

Sell 1Q2010 USGC 3.0% Fuel Oil

Long Natural Gas

Buy Summer 2010 NYMEX Natural Gas July 15, 2009 - Commodity Watch $5.43/mmBtu $6.10/mmBtu $0.67/mmBtu

Long Platinum

Buy January 2010 NYMEX Platinum July 15, 2009 - Commodity Watch $1,140.6/toz $1,339.4/toz $198.8/toz

WTI call trade

Buy June 2010 NYMEX WTI call struck at $85/bbl June 3, 2009 - Energy Watch $2.93/bbl $3.50/bbl $0.57/bbl

Sell June 2010 NYMEX WTI call struck at $100/bbl

Long corn trade

Buy May 2010 CBOT corn contract May 14, 2009 - Agriculture 468 cents/bu 383 cents/bu (85 cents/bu)

Long timespread WTI trade

Buy December 2009 NYMEX WTI contract February 16, 2009- Energy Weekly ($11.56/bbl) ($8 .06/bbl ) $3.50/bblSell December 2011 NYMEX WTI contract

As of close on October 9, 2009. Inclusive of all previous rolling profits/losses.

Current ValueCurrent

profit/(loss)1Current trades First recommended Initial value

Source: GS Global ECS Research.


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Price actions, volatilities and forecasts

units 09 Oct Change Implied2 Change Realized2 Change 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3m 6m 12m

Energy

0.46

0.17

-0.06

0.08

1.94

8.60

Industrial Metals4

20

-180

80059

Precious Metals

51

1.4

Agriculture

39

3

57

2

12

227

0.3

-4.9

-0.6

1Monthly change is difference of close on last business day and close a month ago.

2Monthly volatility change is difference of average volatility over the past month and that of the prior month (3-mo ATM implied volatility, 1-mo realized volatility).

3Price forecasts refer to prompt contract price forecasts in 3-, 6-, and 12-months time.

4 Based on LME three month prices.

63.2 65.0 65.0 80.072.5 74.7 59.1 60.1n/a 28.2 -12.6 57.9CME Lean Hog cent/lb 50.9 n/a

83.0 85.0 90.0 110.093.7 101.3 88.7 83.8n/a 11.2 -6.4 91.5CME Live Cattle cent/lb 82.6 n/a

14.7 16.0 17.0 17.011.2 13.1 11.6 12.7-3.21 48.6 -1.4 12.5NYBOT Sugar cent/lb 21.2 41.9

2499 2700 2700 27002769 2784 2252 2553n/a 35.9 -3.5 2420NYBOT Cocoa $/mt 3243 n/a

124 130 135 140136 138 112 113n/a 34.6 8.0 143NYBOT Coffee cent/lb 136 n/a

54 50 60 6572 67 47 46n/a 30.6 -0.8 73NYBOT Cotton cent/lb 63 n/a

406 400 400 450629 578 384 377-3.82 55.0 27.0 517CBOT Corn cent/bu 362 30.9

1116 1000 1000 10001388 1320 915 949-6.87 36.6 -25.6 1359CBOT Soybean cent/bu 964 28.1

572 500 500 550843 792 552 551-4.78 44.8 21.9 1028CBOT Wheat cent/bu 468 28.8

13.8 15.6 15.5 16.017.2 15.1 10.2 12.62.51 41.2 -3.8 17.6London Silver $/troy oz 17.6 38.1

922 930 960 960896 872 795 9081.19 15.2 -0.3 925London Gold $/troy oz 1049 23.4

1509 1850 1840 21502150 1798 1219 1208-3.06 44.2 8.5 2460LME Zinc $/mt 2039 44.3

13147 17410 17450 1880025859 19133 11118 10625-0.42 44.4 5.3 29120LME Nickel $/mt 18750 50.0

4708 6970 7000 74008323 7571 3948 3494-4.08 34.3 -0.3 7741LME Copper $/mt 6235 41.1

1530 1680 1720 20502995 2839 1885 1401-3.11 30.5 -1.6 2779LME Aluminum $/mt 1909 35.9

27.57 36.40 39.80 46.6063.08 66.45 65.59 45.306.77 99.6 -40.2 52.75UK NBP Nat. Gas p/th 32.95 55.0

3.81 6.50 7.00 7.7011.47 8.98 6.40 4.47-10.43 140.0 75.8 8.74NYMEX Nat. Gas $/mmBtu 4.77 56.3

1.56 2.20 2.33 2.543.53 3.31 1.84 1.34-0.63 38.6 0.7 2.74USGC Heating Oil $/gal 1.83 47.7

Volatilities (%) and monthly changes2Prices and monthly changes1 Price Forecasts3Historical Prices

WTI Crude Oil $/bbl 71.77 47.2 -0.66 40.2 2.0 97.82 123.80 118.22 59.08 94.0043.31 59.79 85 .00 87.50

117.15 57.49 45.72 59.90 83.50 86.00 92.50Brent Crude Oil $/bbl 70.00 47.3 -0.40 44.1 10.6 96.31 122.79

RBOB Gasoline $/gal 1.77 49.0 -0.01 43.1 -6.3 2.48 3.17 2.96 1.34 1.25 1.71 2.14 2.34 2.36


S&P GSCIEnhanced Commodity Index and strategies total returns and forecasts1

(%) 2007 2008 2009 YTD 12-mo Forecast

S&P GSCI Enhanced Commodity Index 100.0 36.2 -41.1 12.0 17.5

Energy 70.2 44.8 -45.9 15.1 25.0Industrial Metals 7.9 -5.3 -48.9 57.0 5.0

Precious Metals 3.3 28.0 0.5 16.3 -1.0Agriculture 14.3 36.6 -23.4 -6.9 -1.0

Livestock 4.3 1.2 -26.5 -15.1 5.0 1YTD returns through September 30, 2009.

Source: Standard & Poors, GS Global ECS Research.


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Patiently waiting for upside

Commodity returns have remained relatively flat over the last month with the exception of

gold, consistent with a macro economy just beginning to push off the trough, leading to

volatile economic and commodity demand data and a lack of clear direction in the

commodity markets (see Exhibit 1). This has been particularly the case as signs that

developed economies have troughed have led to a renewed focus on the recovery in

developed markets (DM), which has been very fragile and uneven across countries and

sectors in contrast to a clear uptrend in emerging market (EM) growth since the beginning

of the year. Also exacerbating this fundamental uncertainty has been current weak

shoulder month demand, which has muddied the underlying commodity demand picture.

As was the case in 1Q09, the rising uncertainty has led gold to outperform.

Exhibit 1: Economic data have been mixed

US ISM - Sep 52.6 54.0 52.9

US Industrial Production- Aug 0.80% mom 0.60% mom 1.00% mom

US Non-farm payroll - Sep -263000 mom -175000 mom -201000 mom

US Construction spending - Aug 0.80% mom -0.20% mom -1.10% mom

US Personal Consumption - Aug 1.30% mom 1.10% 0.30%US Consumer confidence - Sep 53.1 57.0 54.1

US S&P Schiller/Case House Prices - Jul -13.30% yoy - -15.44% yoyUS U. of Michigan Cons. sentiment - Sep 73.5 70.5 70.2

US New Home Sales - Aug 0.70% mom 1.60% mom 6.50% mom

US Durable Goods orders - Aug -2.40% mom 0.40% mom 4.80% momUS Existing Home Sales - Aug 1.00% mom 2.10% mom 7.20% mom

US House price index - July 0.30% mom 0.50% mom 0.10% momUS Phil Fed Survey - Sep 14.1 8.0 4.2

US Housing starts - Aug 1.50% mom 2.90% mom -0.20% mom

US Retail Sales - Aug 2.70% mom 1.90% mom -0.20% momUS Factory Orders - Aug -0.80% mom 1.00% mom 1.40% mom

US Chicago Purch. Man. Index - Sep 46.1 mom 52.0 50.0Euroland Retail Sales - Aug -0.20% mom -0.50% mom

Euroland PMI - Manufacturing - Sep 49.3 49.0 48.2Euroland Consumer confidence - Sep -20 - -22

Euroland Business confidence - Sep -25 - -26

Euroland Industrial Production- Jul -0.30% mom sa -0.20% mom sa -0.20% mom saGermany Retail Sales - Aug -1.50% mom 0.20% mom 0.70% mom

Germany IFO Business Survey - Sep 91.3 - 90.5Germany Industrial Production- July -0.90% mom sa 1.60% mom sa 0.80% mom sa

Germany Manufacturing orders - July 3.50% mom sa 2.00% mom sa 3.80% mom

Japan Industrial Production- Aug 1.90% yoy - 2.10% yoyJapan Machinery Orders - Jul -9.30% mom -5.30% mom 9.70% mom

Japan Retail Sales - Aug -1.80% yoy -2.40% yoy -2.40% yoyChina Fixed Asset Investment - Aug 33.00% yoy YTD 32.70% yoy YTD 32.90% yoy YTD

China PMI Manufacturing - Sep 54.3 yoy 55 yoy 54 yoyChina Industrial Production- Aug 12.30% yoy 11.80% yoy 10.80% yoy

China Retail Sales - Aug 15.40% yoy 15.30% yoy 15.20% yoy

China Exports - Aug -23.40% yoy -19.00% yoy -23.00% yoyChina Imports - Aug -17.00% yoy -10.50% yoy -14.90% yoy

Brazil Industrial Production - Aug 1.20% mom 1.10% yoy 2.20% momIndia Industrial Production - Jul 6.80% yoy 7.00% yoy 8.20% yoy

South Korea Exports - Sep -6.60% yoy -10.50% yoy -20.60% yoySouth Korea Imports - Sep -25.10% yoy -26.60% yoy -32.20% yoy

South Korea Industrial Production - Aug 1.20% yoy 3.10% yoy 0.90% yoy

Actual

relative to

prior

Region Indicator Recent Consensus Prior

Actual

relative to

consensus

Source: Government sources.

For the rest of the commodities complex, the lack of a clear trend in the economic and

commodity data has created impatience for evidence of improving commodityfundamentals, particularly as equity markets have continued to price in positive leading

indicators, resulting in substantial equity outperformance relative to commodities (see

Exhibit 2). However, as we have been emphasizing for several months, commodity

fundamentals remain generally consistent with the coincidental economic indicators that

remain much weaker and more volatile than the positive leading indicators that are driving

the more anticipatory financial markets (see Exhibit 3). We continue to expect this volatility

in the coincidental data to persist until the commodity markets emerge from the weak

shoulder month period in demand and the economic recovery gains more solid footing.


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Exhibit 2: Commodities have continued tounderperform equitiesS&P GSCI Enhanced Total Return Index/S&P 500 TotalReturn Index (rising line = commodities outperformance)

Exhibit 3: as equities are pricing positive leadingindicators while commodities are pricing weakercoincidental indicatorsDiffusion index, left axis; Index, right axis

0.175

0.180

0.185

0.190

0.195

0.200

0.205

0.210

0.215

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09

Commodityunderperformance

20

25

30

35

40

45

50

55

60

65

70

Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09

95

97

99

101

103

105

107

109

111

113

115

US ISM New Orders Index (left axis) US Industrial Production Index (right axis)

Source: Standard & Poors, Compustat and GS Global ECS Research. Source: Institute of Supply Management (ISM) and US Federal Reserve Board(FRB).

However, it is important to emphasize that our forecasts embed only moderate

improvements in commodity demand heading into the year, and both economic and

commodity data continue to suggest that such improvements lie ahead. The US

manufacturing sector continues to expand, the slowdown in destocking across the US

manufacturing base has just begun in earnest and Chinese activity indicators remain

robust. On the commodity side, US truck tonnage and Chinese container shipments to the

US are on the rise, implied oil demand in China has exceeded pre-recession levels and our

Chinese copper inventory indicator suggests a shift into Chinese destocking for the first

time this year.

On net, these relatively positive demand indicators against limited expected production

growth continue to suggest that the oil market will shift into a seasonally-adjusted deficit

in the near term. As a result, we continue to forecast rising oil prices and returns later this

year and into 2010. We also expect a similar dynamic to lend substantial support to copper

in the coming months while supportive underlying demand trends will limit downside for

more amply supplied metals, in our view.

In agriculture, fundamentals remain the tightest for key softs, leading to substantial

outperformance of cocoa and sugar in particular in recent months. We continue to expect

prices for these softs to remain high and volatile in the near term as the market responds

to tight fundamentals, which leave the market exceptionally vulnerable to any further

supply disruptions. However, we believe that price risk is skewed to the downside over the

medium term given a likely supply response to current historically high prices in the nextset of growing seasons, especially for sugar where the supply disruption was primarily

weather related.

In contrast to the softs, fundamentals have generally remained much weaker for the major

grains and oilseeds largely owing to very favorable US growing weather in recent months.

Although frost concerns have led to recent price volatility for the late-maturing US crops,

we believe that current price levels are generally consistent with fundamentals for the

major crops, with the exception of corn, where we continue to expect moderate upside

over a 12-month horizon, especially in the context of our constructive energy view. On net,

we maintain a 12-month forecast for the S&P GSCI Enhanced Total Return Index at 17.5%

and our recommendation for an overweight allocation to commodities.


6/27



Energy: -0.2% from August 31, 2009 through September 30, 2009;+15.1% ytd through September 30, 2009

Petroleum

-1.5% from August 31, 2009 through September 30, 2009; +20.2% ytd through

September 30, 2009

Energy prices and returns remained relatively flat over the last month as volatile economic

and oil data consistent with a macro economy just beginning to push off the trough left the

markets with a lack of clear direction. For example, while emerging market economic data

has remained consistently positive, OECD data has been uneven with a slew of much

better-than-expected data in the July/August time period followed more recently by

disappointments in key indicators such as the US ISM Manufacturing Index and US non-

farm payrolls. Similarly, for oil in particular, seasonally strong gains in US implied demand

numbers in recent months have largely reversed while the pattern of much larger-than-

normal draws in OECD inventories has slowed. Exacerbating this uncertainty has been

current weak shoulder month period between the US driving and heating/pre-Christmasindustrial ramp-up seasons, which has further muddied underlying demand trends. We

continue to expect this volatility in the data to persist until the oil market emerges from the

shoulder month period and the economic recovery gains more solid footing.

However, several additional data points in the recent period continue to point toward

future rising oil demand, particularly for the distillate complex, where oversupply remains

the most severe. In particular, the US ISM Inventory Index showed substantial

improvement last month, suggesting that the anticipated slowdown in destocking in the

manufacturing base is more firmly underway (see Exhibit 4). As we have emphasized in

recent months, this slowdown in destocking will likely boost manufacturers shipments,

and, in turn, demand for diesel, as has been the case in the past (see August 7, 2009

Energy Weekly: Distillate draws, but stronger distillate demand still required). Although

this support to distillate demand has likely been masked somewhat by seasonal demandweakness, we continue to expect this deceleration in destocking to help boost distillate

demand in the coming months. Further, industry statistics also suggest the potential for

increasing demand for industrial-related transportation fuels. For example, US truck

tonnage has come off its bottom in line with the incipient improvements in US implied

distillate demand (see Exhibit 5).


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Exhibit 4: The US ISM Inventory Index reboundedsubstantially in SeptemberDiffusion Index: >50 = expansion

Exhibit 5: US truck tonnage has begun to reboundIndex, January 2008 = 100, left axis; thousand b/d, right axis

20

25

30

35

40

45

50

55

60

65

70

Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09

ISM New Orders ISM Production ISM Inventories

75

80

85

90

95

100

105

Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09

3000

3200

3400

3600

3800

4000

4200

4400

Manufacturers' Shipments of Durable Goods

Truck Tonnage Index

Distillate Fuel Oil Demand 4-wk average (right axis)

Source: ISM. Source: American Trucking Association, Census Bureau and US Department of

Energy (DOE).

Despite these positive indicators for future demand, it is important to emphasize that our

forecasts only embed modest demand improvements for 4Q09, which we expect to be

sufficient to return the market to a seasonally-adjusted deficit, helping to push OECD total

petroleum inventories down toward 10-year average levels. For example, our 4Q09

average US oil demand forecast is 19.3 mmb/d not much below current levels. We

maintain that these improving fundamentals should lend support to timespreads, pushing

WTI prices up to $85/bbl by year end. Further, as spare OPEC production capacity is likely

exhausted over the next year amid non-OPEC production declines and further expected

improvement in demand, we believe that tighter fundamentals and renewed focus on the

need for substantial new long-term production capacity will lead oil prices to rise further to

$95/bbl by year end 2010. These views lead us to maintain a 25% 12-month forecast for the

enhanced energy index.

Natural gas

+16.3% from August 31, 2009 through September 30, 2009; -19.2% ytd through

September 30, 2009

In contrast to oil, natural gas prices and returns increased sharply in September as the US

market balance tightened. Specifically, despite record-high US inventory levels, the market

has increasingly focused on the sequential tightening of the fundamentals reflected in the

weekly inventory builds reported by the DOE. In particular, storage injections in September

were lower than a year ago, even though temperatures were cooler and despite hurricane-

related supply disruptions of as much as 6 Bcf/d (more than 10% of total US natural gas

production) in September last year. On a weather-adjusted basis, this sequential tightening

has been even more visible, with September injections much tighter relative to the 5-year

average than what was observed in August (see Exhibit 6).


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Exhibit 6: The weather-adjusted balance was particularly tight in September, especiallywhen taking the hurricane-related supply disruptions from last yearBcf/week

-250

-200

-150

-100

-50

0

50

100

150

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

5yr Average 2009 2008 2007 2006

Source: DOE and GS Global ECS Research.

Driving this tightening of fundamentals has been a combination of four main factors,

namely: 1) structural production declines owing to the collapse in drilling since September

2008, 2) temporary production shut ins motivated by regional constraints in pipeline

capacity, 3) strong coal-to-gas substitution, which intensifies in the shoulder months, when

spare capacity in combined cycle gas turbines (CCGT) increase, and 4) Canadian export

declines, owing to their own structural production declines.

As a result of this tightening, natural gas prices have risen significantly in the past severalweeks, also helped by the October contract expiration on September 28, which rolled off

the board more than $1/mmBtu below the close for the November contract. This one-day

jump in prompt prices drove natural gas above coal generation costs for the first time in

more than four months (see Exhibit 7).


9/27



Exhibit 7: Natural gas prices have risen substantially and are now above coal generationcosts$/mmBtu

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

9-Apr 24-Apr 9-May 24-May 8-Jun 23-Jun 8-Jul 23-Jul 7-Aug 22-Aug 6-Sep 21-Sep 6-Oct

NYMEX natural gas Appalachian coal

The expiration of the October 2009 NYMEX

natural gas contract helped pull gas prices

above coal generation costs for the first time

in months.

Source: NYMEX and GS Global ECS Research.

Although the temporary shut ins driven by pipeline constraints are likely to be suspended

as we approach the end of injection season, going forward, we expect NYMEX natural gas

prices to remain above coal costs and to continue to strengthen driven by two factors,

namely: 1) weather deviations in October as current forecasts call for the significantly

colder-than-average temperatures felt this month to persist for the coming weeks, and 2)

the continued accumulation of structural production declines. Specifically, we believe that

these declines will eventually turn larger than demand loss from the reversal of the coal-

to-gas substitution process in response to these new coal/gas relative prices. Accordingly,

we continue to believe that prices have to rise enough to provide the economic incentive

for marginal producers to drill and therefore maintain our 2009/2010 winter and 2010

summer price forecasts at $6/mmBtu and $7.50/mmBtu, respectively.

Industrial Metals

-2.4% from August 31, 2009 through September 30, 2009; +57.0% ytd through

September 30, 2009

Industrial metals prices and returns declined modestly in the recent period, as concerns

over a still fragile DM recovery combined with a slowdown in EM growth momentum

weighed on the market. Specifically, recent data releases out of the DM countries haveremained mixed, consistent with a macro economy just coming off the trough but lacking

a clear uptrend. In addition, a significant slowdown in Chinese metal imports and the long

national holiday break further dampened sentiment. Consequently, trading in the base

metals markets has been thin and with a downward bias, which was especially apparent

when the market barely moved in the face of news about a potential major copper supply

disruption at the Spence mine.

Nonetheless, a number of fundamental factors continue to reinforce our view that

downside remains limited across the metals and substantial upside exists for some metals,

copper in particular due to: 1) sustained strong EM growth as evidenced by the robust

September Chinese PMI at the same time that our Chinese copper inventory indicator

pointed to a destocking in August for the first time in 2009 (see Exhibit 8), 2) substantial


10/27



slowing of manufacturing destocking in DM as reflected in an 8.1 point jump in the

September US ISM Inventory Index, and 3) a gradual pickup of economic activity in DM.

Exhibit 8: For the first time in 2009, fabricators in China destocked in AugustChinese refined copper supply/Chinese semis production

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

1.3

Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09

Ratio of metal to semis Average

Above line: stocking

Below line: de-stocking

Source: China Non-Ferrous Metal Industry Association, GS Global ECS Research.

It is important to emphasize that our price outlook for the base metals is not based on a

major demand improvement in DM. On the contrary, we are embedding a modest

sequential pickup in 3Q09 and 4Q09. Although US ISM production and new orders

disappointed on the downside, the fact that the headline index and various components

remain firmly in expansionary territory is consistent with our forecast of modest DMmetals demand improvement heading into the end of the year. Moreover, Alcoas 3Q09

release surprised to the upside as order improvement, though small, occurred across all

product divisions except for aerospace, again consistent with a gradual economic

recovery.

Within the metals complex, differing short-term supply and demand drivers contributed to

divergent price movements and returns. Nickel sold off the most on the resumption of

inventory builds, which have pushed total exchange inventories to over 120kt despite a

prolonged strike at the Vale Sudbury and Voiseys Bay operations. Copper also declined

owing to an expected slowdown in Chinese buying, which contributed to rising exchange

inventories, as well as a report of higher Chilean August production. In contrast, aluminum

prices and returns held their ground as rising demand from the US Cash-for-Clunkers

Program offset rising production resulting from pervasive Chinese restarts, leading to asmall draw in total aluminum exchange inventory. Further, lead and zinc gained over the

month most likely reflecting the markets expectation of the shutdown of Chinese lead

smelters, which could cut zinc supply if mines are closed. These concerns over zinc shut-

ins overshadowed a string of announced zinc production restarts, no longer limited to

China but from majors around the world.

Going forward, we maintain that upside remains the largest for copper, where moderate

improvements in demand against limited supply growth will likely return the market to

deficit in the near-to-medium term. Although we continue to expect production gains to

meet demand increases for most of the rest of the complex, we believe that improving

demand as the global economic recovery gains more solid footing will likely limit price


11/27



downside particularly as spare capacity gradually disappears and the cost of production

steadily climbs. Although the DM recovery is in a nascent stage, production costs have

already begun to climb, evidenced by a 13% quarter-on-quarter increase in operating costs

from 2Q to 3Q according to Alcoas 3Q report. Therefore, we maintain our target prices for

all base metals and view the recent pull back as a buying opportunity for copper in

particular.

Precious Metals

+6.5% from August 31, 2009 through September 30, 2009; +16.3% ytd through

September 30, 2009

COMEX gold prices rallied substantially in September and have continued to move higher

thus far in October, carrying COMEX gold prices to a record high closing price of $1056/toz.

The rally began with a surge in net speculative long positions in COMEX gold futures to a

new high of 28.8 million toz initially motivated by Barrick Gold Corporations

announcement that it would be buying back its gold hedges using the proceeds of a $4

billion equity offering (see Exhibit 9). Prices have subsequently received support from the

weakening of the US dollar, which has seen the euro strengthen to 1.47 against the US

dollar.

While the rally led precious metals to outperform in the recent period, it is interesting to

note that precious metals have now outperformed equities and the broader commodity

index over the past 1, 5, and 10 years (see Exhibit 10). For example, $1 invested in precious

metals 10 years ago through the S&P GSPM total return index would be worth $3.15 at the

end of September, while $1 invested in the S&P 500 would be worth only $0.94 and in the

broader S&P GSCI $1.69. Although the performance of the equity and broader

commodity indices has clearly been undercut by the global recession, the performance of

gold over this period has been impressive.

Exhibit 9: A surge in net speculative length pushed

COMEX gold prices to a new record high level$/toz (left axis), million toz (right axis)

Exhibit 10: Gold has now outperformed equities and the

broader commodity index over a 10-year horizon.Total return through September 30, 2009 on $1 invested

600

700

800

900

1000

1100

1200

Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

COMEX gold price Net speculative length (right axis)

A surge in net spec ulative long positions

drove gold prices to new highs

1 yr a go 5 yrs a go 10 yrs a go

Equities S&P 500 1.12 1.05 0.94

Commodities S&P GSCI 0.64 0.67 1.69

Precious metals S&P GSPM 1.15 2.25 3.15

Gold S&P GSGC 1.13 2.26 2.99

Silver S&P GSSI 1.39 2.17 2.84

Value of $1 invested

Source: COMEX, CFTC, and GS Global ECS Research. Source: S&P and GS Global ECS Research.


12/27



Although the recent surge in gold prices and speculative long positions has been linked to

the weakness in the US dollar and concerns surrounding the potential for US inflation, we

continue to view US real interest rates as the main driver of gold prices over the medium

term (see Exhibit 11 and our GS Global ECS Research Frameworks: Forecasting gold as a

commodity, March 25, 2009). Net speculative long positions in COMEX gold futures are a

mirror image of the US 10-year TIPS yield, suggesting that both speculative flows and gold

prices are being driven by real interest rates. In our view, real interest rates affect thefundamentals of gold supply and demand by changing the tradeoff between pulling gold

out of the ground today versus leaving it in the ground to be mined tomorrow. In a low

real interest rate environment, the incentive increases to leave gold in the ground longer,

putting upward pressure on gold prices. While we find that gold prices keep pace with

inflation over the longer-term, we believe gold prices have been well-supported over the

recent period by the low real interest rate environment alone. This fits well with the fact

that inflation expectations as measured by the breakeven inflation rates priced into the

spread between nominal and inflation-protected 10-year US Treasury yields have been

relatively stable and well-below the levels seen prior to the recession (see Exhibit 12).

Exhibit 11: Gold speculative positions are sensitive toUS real interest rates, which have been decliningMillion toz (left axis), % per annum (right axis, inverted)

Exhibit 12: but not to US breakeven inflation rates,which have been stable recentlyMillion toz (left axis), % per annum (right axis)

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Net speculative length 10 yr US TIPS yield (right axis, inverted)

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

0.00

0.50

1.00

1.50

2.00

2.50

3.00

Net speculative length Market breakeven inflation (right axis)

Source: CFTC, US FRB, and GS Global ECS Research. Source: CFTC, US FRB, and GS Global ECS Research.

Further, as we discussed in our last Commodity Watch, the continuing decline in US real

interest rates continues to present upside risk about half of which has been realized to

our $960/toz forecast. Our $960/toz forecast is based upon a 10-year US TIPS yield of

2.00%, a level that it was trending towards this summer. However, US TIPS yields have

now declined to 1.50%, with the US dollar weakening (see Exhibit 13). As discussed in our

Frameworksreport, a 1.50% 10-year US TIPS yield supports a gold price closer to $1150-

$1200/toz over the medium-term (see Exhibit 14). Consequently, should US real interest

rates remain at these lower levels, we would expect to see continued significant upside

risk to our $960/toz forecast. This leads us to continue to recommend a long January 2010

NYMEX platinum position as a gold plus trade (see our July 15, 2009 Commodity

Watch).


13/27



Exhibit 13: 10-year US TIPS yields have been decliningand the dollar weakening% per annum (right axis), EUR/$ (right axis)

Exhibit 14: raising upside risk to $1150-$1200/tozshould real interest rates remain near current levelsTable reproduced from our March 25, 2009 report

1.00

1.25

1.50

1.75

2.00

2.25

2.50

Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

10 yr US TIPS yield EUR/$ (right axis)

US 10 yr TIPS yield built into our $960/toz forec ast

Declining real yields highlight substantial upside risk

US 10 yr TIPS yield Net speculative length Front-month gold price

% per annum million toz 2008 USD/toz

0.00 20.8 1780

0.50 18.5 1555

1.00 16.2 1358

1.50 13.9 1186

2.00 11.5 1036

2.50 9.2 905

3.00 6.9 790

3.50 4.6 690

4.00 2.3 603

4.50 0.0 526

5.00 -2.3 460

5.50 -4.7 401

Source: US FRB and Goldman Sachs. Source: COMEX, CFTC, US FRB, and GS Global ECS Research.

Agriculture

-1.7% from August 31, 2009 through September 30, 2009; -6.9% ytd through

September 30, 2009

Agricultural returns were largely flat in the recent period as strong grains in several of the

softs and corn offset weather-related declines in the rest of the complex. Specifically,

cocoa and sugar remained the focus as both markets set new multi-year highs in

September. Driving strong cocoa prices and returns have been tight fundamentals that areexpected to continue (see Exhibit 15). The International Cocoa Organization (ICCO)

estimates that global supply in the year ending this month will trail demand for a third year

as global production is down 7%, an even greater decline than observed for cocoa

grindings despite the global recession. Further, the deficit is expected to continue in the

coming year largely driven by expectations of production declines in the Ivory Coast, the

largest producer, on several difficulties including ageing trees, disease and lack of

investment. In addition, lingering risks that an El Nio weather pattern will cut output in

Indonesia - the third-biggest producer - also presents risk to production. At the same time,

cocoa grindings, a gauge of demand, are expected to increase 2% next year as economic

growth recovers.


14/27



Exhibit 15: The cocoa market has remained in deficitStock to use ratio

30%

35%

40%

45%

50%

55%

60%

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/04

2004

/05

2005

/06

2006

/07

2007

/08

200

8/09

E

ICCO 2008/09E: 42.6%

Avg. since 1998: 48.4%

5-yr Avg: 47.8%

Source: International Cocoa Organization, GS Global ECS Research.

Sugar prices also remained volatile at exceptionally high levels over the past month,

reaching the highest level in over 28 years before declining again in recent days. Prices fell

sharply in early September on signs that India, the largest consumer, was slowing

purchases after prices spiked above 24 cents/lb. However, prices surged again by the end

of the month as production concerns from Brazil, the largest producer, resurfaced. In

particular, Brazils center south, the worlds biggest sugar-producing region, is now

expected to produce less than previously forecasted as heavy rains have hindered

harvesting and reduced the canes level of sucrose. This rally was accompanied by

renewed investor interest with CFTC net long speculative lengths nearing 200k, shy of their

ytd highs. We continue to expect sugar prices to remain high and volatile in the near term

as the market responds to tight fundamentals, which leave the market exceptionally

vulnerable to any further supply disruptions. However, we believe that price risk is skewed

to the downside over the medium term given a likely supply response to current

historically high prices in the next set of growing seasons.

In contrast, fundamentals for the major grains and oilseeds have generally been much

softer, but price action has been mixed. In particular, corn prices rallied sharply over the

past month largely owing to frost concerns for the late-maturing US corn crop and its

lagging harvest, which likely motivated a sharp reversal in net speculative length in corn

from a near four-year record short to slightly long. Also lending support were lower-than-

expected corn stocks as reported in the USDAs September 30 Grains Stocks report,attributed to greater-than-expected corn use this summer with the USDA in particular

raising its 2008/09 US corn usage for ethanol in its October 9 WASDE report. Although

ethanol production data are only available through July, the improved ethanol margins

that we continue to observe are consistent with this increased ethanol-related corn usage

(Exhibits 16 and 17).


15/27



Exhibit 16: Improving ethanol economics suggest risingbiofuel-related corn usageCents/gallon

Exhibit 17: Production of fuel ethanol continues toincrease stronglyThousand barrels

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar- 05 Aug- 05 Jan- 06 J un-06 Nov- 06 Apr- 07 Sep- 07 Fe b-0 8 Jul -08 Dec-08 May-0 9

Historical ethanol margin Current margin

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

25,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2008 2007 2006 2005

Source: CBOT, NYMEX and GS Global ECS Research. Source: DOE, GS Global ECS Research.

These changes modestly tightened US stocks/usage heading into the current 2009/10 crop

year that began on September 1. Looking ahead, the USDA also raised estimated demand

for the current crop year largely on stronger expectations for feed demand. However,

dominating the stronger demand outlook was a substantial increase in the US 2009/2010

corn yield estimate to a new record-high 164.2 bushels/acre, above consensus

expectations. On net, this expectation for a record-large US corn crop harvested in the

coming weeks suggests the US corn market will likely be balanced this year, as opposed to

prior expectations of a slight deficit (see Exhibit 18). Nevertheless, the USDA revised its

global stocks/usage ratio modestly lower on stronger feed demand, still pointing to a

deficit in the global corn market in the current 2009/2010 crop year (see Exhibit 19). On net,

although we continue to believe that risks to our near-term corn forecasts are skewed tothe downside given the extraordinarily large US harvest, we maintain that expected corn

fundamentals are consistent with moderately higher prices on a 12-month horizon relative

to the current forward curve, particularly in the context of our constructive oil price views.


16/27



Exhibit 18: Global corn balance tableMillion bushels

Exhibit 19: US corn balance tableMillion bushels

October October

WASDE WASDE

USDA USDA USDA

2006/07 2007/08E 2008/09E 2009/10E

Planting AnalysisArea Harvested (mm ha) 149.2 159.9 157.2 157.1

Harvested Yield (MT/ha) 4.8 5.0 5.0 5.0

Total Supply (mm MT) 927.2 999.0 999.8 1,021.3

Production 712.2 791.7 791.3 792.5

Imports 90.8 98.4 78.2 81.9

Total Domestic Use (mm MT) 724.2 769.7 773.5 800.7

Food, Seed, Industrial 184.3 189.1 196.2 198.2

Total Feed 496.6 522.0 507.5 523.4

Corn Feed 477.7 496.5 477.1 488.9

DDG 18.9 25.5 30.4 34.5

Fuel (mm MT) 62 84 100.2 113.6

Fuel (kb/d) 431 582 695 787

Ethanol (bg/y) 7 9 11 12

Exports 93.9 98.6 79.5 84.4

Inventory Change (mm MT) (15) 22 17 (11)

Beginning Stocks 124.2 109.0 130.3 146.8

Ending Stocks 109.0 130.7 146.8 136.2

Days of Forward Coverage 55 62 69 62

Stocks/Use Ratio 15.1% 17.0% 19.0% 17.0%

Global Corn

Supply/Demand Balance

October October WASDE WASDE

USDA USDA USDA

2006/07 2007/08E 2008/09E 2009/10E

Planting Analysis

Area Planted (mm acres) 78.3 93.5 86.0 86.4

Area Harvested (mm acres) 70.6 86.5 78.6 79.3

Harvested Yield (bu./acre) 149.0 150.7 153.9 164.2

Total Supply (mm bu) 12,507 14,361 13,740 14,706

Production 10,528 13,038 12,101 13,018

Imports 12 20 14 10

Total Domestic Use (mm bu) 9,079 10,300 10,204 10,877

Food, Seed, Industrial 1,271 1,336 1,275 1,278

Total Feed 6,263 6,857 6,353 6,673

Corn Feed 5,589 5,938 5,230 5,398

DDG 673 919 1,123 1,275

Fuel (mm bu) 2,218 3,026 3,700 4,200

Exports 2,125 2,436 1,858 2,150

Total Disposition (mm bu) 11,203 12,736 12,062 13,027

Inventory Change (mm bu) (663) 321 52 1

Beginning Stocks 1,967 1,304 1,625 1,678

Ending Stocks 1,303 1,625 1,678 1,679


Stocks/Use Ratio 11.6% 12.8% 13.9% 12.89%

U.S. Corn


Source: US Department of Agriculture (USDA), GS Global ECS Research. Source: USDA, GS Global ECS Research.

Soybean prices and returns have also rebounded sharply in recent days on frost concerns

and rain-related harvest delays. With US soybean development still lagging, we expect the

market to continue to focus in the near term on frost risks and potential disease damagefrom increased dampness. However, the USDA raised estimated US soybean stocks as of

September 1 by more than anticipated in its September 30 Grains Report, which modestly

eased concerns over old-crop supply. Further, the outlook for forward balances remains

softer, with the USDA leaving US 2009/1010 ending stocks/usage essentially unchanged at

higher levels and revising its global stocks/usage estimates modestly higher primarily on

the larger expected US crop and rising expectations of Argentine acreage in the upcoming

southern hemisphere planting season (see Exhibits 20 and 21). On net, these changes to

stocks/usage are minor and thus we are leaving our soybean forecasts unchanged at 1,000

cents/bu on a 3-, 6- and 12-month horizon.


17/27


18/27



Exhibit 22: Global wheat balance tableMillions bushels

Exhibit 23: US wheat balance tableMillions bushels

October October

WASDE WASDE

USDA USDA USDA

2006/07 2007/08 2008/09E 2009/10E

Planting Analysis

Area Harvested (mm ha) 212.3 218.1 225.4 226.5

Harvested Yield (MT/ha) 2.81 2.80 3.03 2.95

Total Supply (mm MT) 856.8 851.6 940.6 954.6

Production 595.6 610.9 682.3 668.1

Imports 114.5 113.7 136.2 119.7

Total Domestic Use (mm MT) 618.2 612.9 633.2 643.1

Feed and Residual 106.2 96.2 112.8 110.7

Food, Seed, Industrial 512.0 516.7 520.4 532.4

Exports 111.6 117.5 140.7 124.8

Inventory Change (mm MT) (20) (6) 44.6 20.0

Beginning Stocks 146.7 127.0 122.1 166.8

Ending Stocks 127.0 121.2 166.8 186.74,453


Stocks/Use Ratio 20.5% 19.8% 26.3% 29.0%

Global Wheat


October October WASDE WASDE

USDA USDA USDA

2006/07 2007/08E 2008/09E 2009/10E

Planting AnalysisArea Planted (mm acres) 57.3 60.5 63.2 59.1

Abandonment Rate 18.4% 15.7% 11.9% 15.3%

Area Harvested (mm acres) 46.8 51.0 55.7 50.1

Harvested Yield (bu./acre) 38.7 40.2 44.9 44.3

Total Supply (mm bu) 2,504 2,619 2,931 2,986

Production 1,812 2,050 2,498 2,220

Imports 122 113 127 110

Total Domestic Use (mm bu) 1,140 1,050 1,260 1,223

Food and Seed 1,019 1,034 1,000 1,033

Feed and Residual 121 15 260 190

Exports 908 1,264 1,015 900

Total Disposition (mm bu) 2,048 2,313 2,275 2,122

Inventory Change (mm bu) (115) (150) 351 207

Beginning Stocks 571 456 306 656

Ending Stocks 456 306 656 863.4


Stocks/Use Ratio 22.3% 13.2% 28.9% 40.68%

U.S. Wheat


Source: USDA, GS Global ECS Research. Source: USDA, GS Global ECS Research.

Livestock

+1.1% from August 31, 2009 through September 30, 2009; -15.1% ytd through

September 30, 2009Livestock returns were relatively flat over the month as moderate gains in lean hogs offset

declines in cattle. Driving positive lean hog returns, which have expanded in recent days,

has largely been stronger demand for pork motivated by exceptionally weak pricing in the

recent period. In addition, the USDA Quarterly Hogs and Pigs report reflected lower hog

and pig inventories relative to a year-ago and fewer sows farrowing than last year during

June-August 2009, with lower farrowings intended as well in the current September-

November 2009 quarter, suggesting tighter supplies. Further, frozen pork in cold storage

drew substantially although remains above last year and five-year-average levels by 3%

and 19.2%, respectively. Going forward, we continue to expect further tightening in

fundamentals later this year and into 2010 on both reduced supplies given the ongoing

inventory liquidation and rising demand on improving economic conditions. As a result,

we continue to expect moderate upside in prices and returns in coming months.

In contrast to lean hogs, live cattle prices and returns have been pressured lower in the

recent period owing largely to continued weak consumer demand for higher-priced beef

relative to pork and poultry as rising unemployment leaves consumers cost conscious.

Resulting weakness in cash prices has also motivated an unusually high number of cattle

to be scheduled for delivery against the October CME contract rather than sold in the cash

market, with many of the delivered cattle expected to be exceptionally heavy given optimal

grazing conditions in parts of the Midwest. On net, expectations of larger supplies in the

near term against still-weak demand have led to recent declines in prices and returns.

Although we expect these factors to limit near-term upside, we maintain that tight feedlot

supplies against an expected improvement in demand as the economic recovery gains


19/27



more solid footing to lend support to prices from current levels over the medium term.

Although placement of cattle on feed continued to rise in August, overall inventory of

cattle on feed remains exceptionally low (see Exhibit 24).

Exhibit 24: Inventory of cattle on feed remains exceptionally lowNumber of cattle (000)

9,000

9,500

10,000

10,500

11,000

11,500

12,000

12,500

Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan

2009 2008 2007 2006 2005 2004

Source: USDA.


20/27



Commodities in a nutshell

Commodities Recent events/outlook and key issues12-m priceforecasts

Energy

WTI Crude Oil Although strong oil demand from China and the non-OECD countries against supply constraints helped propel WTI crude oil

prices to over $145/bbl in 1H08, the collapse in world oil demand in 4Q08 as the global credit crunch intensified pushed

crude oil prices down toward $30/bbl earlier this year. While aggressive OPEC production cuts and non-OPEC production

declines helped lift prices off these lows, in our view the general price recovery during 2Q09 was largely driven by a reversal

of pricing dislocations caused by the credit crisis. Because higher prices have largely owed to a reversal of these

dislocations, we believe that improving fundamentals as the economy recovers amid limited supply growth will provide a

catalyst for further upside. In particular, we believe that a slowdown in the severe inventory liquidation that took place

during 1H09 across US industries will help improve demand in coming months. We maintain our year-end 2009 and 2010

WTI price forecasts at $85/bbl and $95/bbl, respectively.

$94/bbl

Brent Crude Oil We continue to expect the same positive drivers of WTI to generate further upside for Brent for the balance of this year and

in 2010.$92.50/bbl

RBOB Gasoline Gasoline surpluses have been relatively constrained over the course of the past 12 months due to low refinery utilization on

weak margins and more resilient demand relative to other fuels that have greater leverage to the industrial cycle. However,

margins have steeply declined since the beginning of September, in line with the seasonal pattern. We believe that gasoline

is likely to remain seasonally weak in the near term. Longer term, substantial upgrading of refinery capacity globally,

combined with excess ethanol capacity, suggests that gasoline supply will be ample, limiting upside.

$2.36/gal

USGC Heating Oil Distillate demand remains weak, leading to further builds in already exceptionally high inventories. However, we believethat this demand weakness has been consistent with severe destocking across the manufacturing base, which has

depressed demand for shipments. The recent rebound in the US ISM Inventory Index suggests that this slowdown in

destocking has just begun in earnest, with an expected boost in shipments and related distillate demand likely becoming

more apparent as the market moves out of the seasonally weak shoulder period in demand. Thus, we continue to expect

moderate improvement in margins from current low levels. Longer-term, we believe that distillate-led demand growth from

emerging economies will likely lead to relative strength in distillate fuels.

$2.54/gal

NYMEX Nat. Gas Natural gas prices and returns increased sharply in the past month as the US market balance tightened. Driving this

tightening has been: 1) structural production declines owing to a collapse in drilling, 2) temporary production shut ins

motivated by regional constraints in pipeline capacity, 3) strong coal-to-gas substitution and 4) Canadian export declines

owing to their own structural production declines. Although these factors have pushed natural gas prices above coal prices,

suggesting less demand for natural gas, we expect forecasted cold weather and production declines to continue to tighten

fundamentals. As a result, we continue to believe that additional drilling will be required to avoid much tighter

fundamentals in 2H10 and that prices will have to rise to provide the economic incentive for marginal producers to drill.

$7.70/mmBtu

UK NBP Nat. Gas UK NBP prices have remained low, near US natural gas prices, as inventories in the region are virtually full. We expect UK

NBP prices to remain disconnected from the Continental (oil-indexed) gas prices and more in line with US levels over the

next 12-18 months as excess global LNG will likely keep the market well supplied.

46.60 p/th

Industrial Metals

LME Aluminum Aluminum prices and returns had received support this summer on a series of temporary factors that left Asia short the

metal as well as a boost in demand as auto producers prepared to ramp up production to meet rising demand resulting

from auto incentive programs. In the recent period, signs of supportive demand continue to mount as industrial and

construction activity in OECD countries improves. However, production of primary aluminum has been increasing steadily

with smelter restarts no longer limited to China. We believe that a sustained aluminum surplus will likely keep aluminum

timespreads under pressure. However, we expect the combination of rising production costs as well as anticipated further

economic recovery that will increasingly motivate the market to shift from pricing long-term supply destruction to long-term

investment to will lend support to long-dated aluminum prices, offsetting much of the timespread weakness. As a result, we

believe that price and returns downside is limited from current levels.

$2050/mt

LME Copper Copper prices and returns have been generally under pressure in the recent period largely as an expected slowdown in

Chinese buying from record-high levels earlier this year has pressured timespreads. Nevertheless, we continue to expect the

market to shift into deficit later this year as OECD demand rebounds amid robust emerging market demand and limited

supply growth given current high capacity utilization. We maintain that a tightening balance will support timespreads at the

same time that expectations of further economic recovery will lend broad support to price levels as spare capacity gradually

disappears and cost of production steadily rises. Given this, we remain most constructive on copper of all the metals.

$7400/mt

LME Nickel Nickel prices and returns have been under pressure on the resumption of inventory builds, which have pushed total

exchange inventories to over 120kt despite a prolonged strike at the Vale Sudbury and Voiseys Bay operations. This

coincides with a period of slowing steel production in China since early-September and a partial restart of Sudbury.

Although rising demand for nickel has begun to emerge elsewhere around the world in the stainless steel sector on account

of the gentle recovery in demand for consumer durable and industrial equipment and re-stocking by the distributors, we

maintain our neutral view on nickel as the excess supply overhang still poses downside risks.

$18800/mt

LME Zinc Zinc and lead prices and returns gained over the month most likely reflecting the markets expectation of the shutdown of

Chinese lead smelters, which could cut zinc supply if mines are closed. Signs of improving demand for zinc in OECD

countries on top of continued robust growth in China also lent support. However, a string of announced zinc production

restarts continue to suggest that supply will be available to meet rising demand. We continue to expect the global zinc

market to remain in surplus in 2010. However, we still anticipate moderate zinc price upside relative to the current forward

curve as overall inventory levels are still expected to remain lower relative to history compared to aluminum and nickel and

with the Chinese newly-started capacity in 2009, further additional supply response in 2010 will likely be more contained.

$2150/mt


21/27



Commodities Recent events/outlook and key issues12-m priceforecasts

Precious Metals

London Gold Gold prices continued to surge in the recent period, initially triggered by Barrick Gold Corporations plan to use the proceeds

of a $4 billion equity offering to buy back its gold hedges and more recently sustained by fundamental support from a weaker

dollar and a decline in the 10-year US TIPS yield. The sharp decline in US real interest rates suggests upside risk to our gold

price forecast of $960/toz on a 12-month horizon.

$960/toz

London Silver Over the long run, silver prices tend to track gold prices. As concerns over default risk have eased from earlier this year, the

gold to silver ratio has normalized. Thus, our silver forecast reflects the historical ratio to gold. Although the ratio has

remained in its historical range, silver has more recently outperformed gold as improving economic conditions suggest rising

industrial usage of silver in bearings and batteries and electrical applications as well as for brazing and soldering.

$16.0/toz

Agriculture

CBOT Corn Corn prices rallied sharply over the past month largely owing to frost concerns for the late-maturing US corn crop. Also

lending support were lower-than-expected September 1 US corn stocks on stronger ethanol-related usage. Although thedemand outlook has improved primarily on higher expected feed usage, rising expected US corn yields now suggest that the

US market will be balanced in 2009/2010 versus prior expectations of a modest deficit, although global stocks/use is still

expected to decline. While we continue to believe that risks to our near-term corn forecasts are skewed to the downside given

the large US harvest, we maintain that expected corn fundamentals are consistent with moderately higher prices on a 12-

month horizon relative to the current forward curve, particularly in the context of our constructive oi l price views.

450 cents/bu

CBOT Soybean Although the soybean complex remained under pressure for much of September given favorable US growing conditions and

greater-than-expected September 1 US inventories, prices and returns rebounded sharply in recent days on frost concerns

and rain-related harvest delays. Despite these concerns, still-good anticipated US yields and an anticipated rebound in South

American production during the 2009/10 crop year suggests a strong rebound in ending stocks/usage. We therefore believe

price upside will be limited from current levels.

1000 cents/bu

CBOT Wheat Although wheat prices were pulled higher in recent days, we expect upside to remain limited from current levels owing to

prospects of abundant 2009-2010 crops. The optimal Northern Hemisphere growing season reinforces our expectations of a

global wheat surplus next year on top of already high inventories resulting from last years robust harvests. On net, we

maintain our 3-,6- and 12 month wheat price forecasts at 500 cents/bu, 500 cents/bu and 550 cents/bu, respectively.

550 cents/bu

NYBOT Cotton Cotton prices continue to trade range bound as expectations for weak developed market consumer spending offset

anticipated emerging market demand recovery while global production and usage are expected to be balanced this year. We

expect prices to remain within their recent range and maintain our 3-mo price forecast at 50 cents/lb and our 6- and 12-mo

forecasts at 60 cents/lb and 65 cents/lb, respectively.

65 cents/lb

NYBOT Coffee Coffee prices rallied in September, reversing most of their August losses, on concerns that excessive rain in Columbia and

Brazil, the worlds biggest coffee producers, could disrupt harvests and tighten supplies. Brazils plan to boost coffee prices

by purchasing beans from domestic growers also lent support. On net, prospects remain for a tighter 12-month inventory

outlook given reduced output and flat demand.

140 cents/lb

NYBOT Cocoa Cocoa prices and returns rallied strongly over the last month on tight fundamentals in recent months that are expected tocontinue largely on anticipated production difficulties in the Ivory Coast owing in large part to ageing trees, disease and lack

of investment. We continue to believe that risks to our price forecasts are skewed to the upside in the near term.

$2700/m

NYBOT Sugar Sugar prices remained volatile at high levels over the last month as the market continued to grapple with the magnitude of

weather-related production disappointments from India and Brazil and a second consecutive year of substantial deficit. We

continue to expect sugar prices to remain high and volatile in the near term as the market responds to tight fundamentals,

which leave the market exceptionally vulnerable to any further supply disruptions. However, we believe that price risk is

skewed to the downside over the medium term given a likely supply response to current historically high prices in the next

set of growing seasons.

17 cents/lb

CME Live Cattle Live cattle prices and returns have been pressured lower in the recent period owing largely to continued weak consumer

demand for higher-priced beef relative to pork and poultry as rising unemployment leaves consumers cost-conscious.

Resulting weakness in cash prices has also motivated an unusually high number of cattle to be scheduled for delivery against

the October CME contract rather than sold in the cash market, with many of the delivered cattle expected to be exceptionally

heavy given optimal grazing conditions in parts of the Midwest. Although we expect these factors to limit near-term upside,

we maintain that tight feedlot supplies against an expected improvement in demand as the economic recovery gains more

solid footing to lend support to prices from current levels over the medium term.

110 cents/lb

CME Lean Hog Lean hog prices and returns have increased in the recent period, largely driven by stronger demand for pork owing to

exceptionally weak pricing in the recent period. In addition, lower live and frozen hog and pork inventories and declines in

sow farrowings have contributed to tightening supplies. We continue to expect further tightening in fundamentals later this

year and into 2010 on both reduced supplies given the ongoing inventory liquidation and rising demand on improving

economic conditions. As a result, we continue to expect moderate upside in prices and returns in coming months.

80 cents/lb


22/27



Exhibit 25:NYMEX WTI forward curves$/bbl

Exhibit 26: IPE Brent forward curves$/bbl

60

65

70

75

80

85

90

95

100

Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11

08Oct09 08Sep09 08Oct08

60

65

70

75

80

85

90

95

100


08Oct09 08Sep09 08Oct08

Source: Goldman Sachs. Source: Goldman Sachs.

Exhibit 27:NYMEX gasoline forward curvesCents per gallon Exhibit 28:NYMEX heating oil forward curvesCents per gallon

140

160

180

200

220

240

260


08Oct09 08Sep09 08Oct08

160

180

200

220

240

260

280

300


08Oct09 08Sep09 08Oct08


Exhibit 29: IPE gasoil forward curves$/MT

Exhibit 30:NYMEX natural gas forward curves$/mmBtu

400

500

600

700

800

900

1000


08Oct09 08Sep09 08Oct08

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

Nov-08 Feb-09 May-09Aug-09 Nov-09 Feb-10 May-10Aug-10Nov-10 Feb-11 May-11Aug-11

08Oct09 08Sep09 08Oct08



23/27



Exhibit 31:LME aluminum forward curves$/mt

Exhibit 32:LME copper forward curves$/mt

1700

1900

2100

2300

2500

2700


08Oct09 08Sep09 08Oct08

Source: Goldman Sachs.

5000

5300

5600

5900

6200

6500

6800


08Oct09 08Sep09 08Oct08


Exhibit 33:LME nickel forward curves$/mt

Exhibit 34:LME zinc forward curves$/mt

11000

13000

15000

17000

19000

21000


08Oct09 08Sep09 08Oct08


1200

1300

1400

1500

1600

1700

1800

1900

2000

2100

2200


08Oct09 08Sep09 08Oct08


Exhibit 35:COMEX gold forward curves$/oz

Exhibit 36:COMEX silver forward curvesCents/oz

850

900

950

1000

1050

1100


08Oct09 08Sep09 08Oct08


1000

1100

1200

1300

1400

1500

1600

1700

1800

1900


08Oct09 08Sep09 08Oct08



24/27



Exhibit 37:CBOT wheat forward curvesCents/bushel

Exhibit 38:CBOT corn forward curvesCents/bushel

400

450

500

550

600

650

700

750

800

Nov-08 Feb- 09 May- 09 Aug-0 9 Nov- 09 Feb- 10 May- 10 Aug-1 0 Nov- 10 Fe b- 11 May- 11 Aug -11

08Oct09 08Sep09 08Oct08

250

300

350

400

450

500

550

Nov- 08 Feb-0 9 May-09 Aug- 09 Nov- 09 Feb-1 0 May-10 Aug- 10 Nov- 10 Feb-1 1 May-1 1 Aug- 11

08Oct09 08Sep09 08Oct08


Exhibit 39:CBOT soybean forward curvesCents/bushel Exhibit 40:NYBOT cotton forward curvesCents/lb

850

875

900

925

950

975

1000

1025

1050


08Oct09 08Sep09 08Oct08

50

55

60

65

70

75

80

Nov-08 Fe b-09 May-09 Aug- 09 Nov-09 Feb- 10 May- 10 Aug- 10 Nov-1 0 Feb- 11 May- 11 Aug- 11

08Oct09 08Sep09 08Oct08


Exhibit 41:CME live cattle forward curvesCents/lb

Exhibit 42:CME lean hog forward curvesCents/lb

80

85

90

95

100

105

Nov-08 Feb- 09 May- 09 Aug-0 9 Nov- 09 Feb- 10 May- 10 Aug-1 0 Nov- 10 Fe b- 11 May- 11 Aug -11

08Oct09 08Sep09 08Oct08

40

50

60

70

80

90

Nov-08 F eb- 09 May- 09 Aug -09 No v- 09 Feb-1 0 May-1 0 Aug- 10 Nov-1 0 Fe b- 11 May- 11 Aug -11

08Oct09 08Sep09 08Oct08



25/27



Exhibit 43: Performance of S&P GSCI Enhanced Commodity Index and strategies through September 30, 2009

Index and strategies Dollar Base Date 30-Sep-09 1-Month 3-Month 12-MonthWeight = 100 Level 2007 2008 2009 YTD Change Change Change

S&P GSCI Enhanced Index 100.00 Dec-69 584.7 36.2 -41.1 12.0 -0.3 -0.9 -35.2Energy 65.18 Dec-82 1258.3 44.8 -45.9 15.1 -0.2 -2.8 -41.3

Petroleum 57.33 Dec-82 1321.1 53.8 -47.1 20.2 -1.5 -3.2 -41.1Industrial Metals 6.43 Dec-76 217.5 -5.3 -48.9 57.0 -2.4 20.8 -10.4Precious Metals 3.82 Dec-72 278.1 28.0 0.5 16.3 6.5 9.9 15.7Agricultural 18.80 Dec-69 109.5 36.6 -23.4 -6.9 -1.7 -2.1 -20.7

Livestock 5.78 Dec-69 160.3 1.2 -26.5 -15.1 1.1 -5.4 -23.9

Commodities

Energy

WTI 31.98 Dec-86 1591.0 55.4 -47.6 20.2 -1.3 -3.2 -41.1Brent 12.69 Jan-99 1346.6 48.2 -44.0 16.7 -1.8 -2.5 -39.8Unlead/RBOB Gas 3.39 Dec-87 1262.5 60.5 -60.2 56.7 -2.3 -1.6 -36.3Heating Oil 4.82 Dec-82 812.5 49.7 -39.1 9.1 -0.6 -4.4 -42.2Gasoil 4.44 Jan-99 883.0 59.4 -48.5 12.5 -2.9 -5.6 -49.3Natural Gas 7.85 Dec-93 459.4 -12.5 -34.0 -19.2 16.3 2.2 -40.9

Industrial Metals

Aluminum 2.58 Dec-90 79.6 -15.0 -39.9 15.2 -1.1 14.3 -28.7Copper 2.29 Dec-76 531.0 12.3 -52.1 98.4 -4.9 23.9 -4.7Lead 0.33 Jan-95 595.3 66.2 -61.1 121.3 7.8 33.6 20.6

Nickel 0.68 Dec-92 353.9 -12.5 -56.3 50.6 -6.4 16.0 10.0Zinc 0.56 Dec-90 142.4 -41.0 -51.3 54.8 4.2 25.5 8.4

Precious Metals

Gold 3.49 Dec-77 268.6 30.0 3.9 13.3 5.9 8.6 13.7Silver 0.33 Dec-72 345.3 14.2 -25.3 46.4 0.0 22.2 34.5

Agriculture

CBOT Wheat 5.20 Dec-69 88.5 81.2 -26.4 -33.4 -8.3 -19.6 -43.2KBOT Wheat 1.23 Jan-99 70.7 71.5 -38.3 -30.2 -8.5 -20.2 -39.9Corn 4.93 Dec-69 88.9 17.3 -14.6 -21.7 4.0 -5.6 -36.6Soybeans 3.19 Dec-69 283.3 62.2 -21.6 6.8 -5.3 -5.5 -2.0Cotton 1.06 Dec-76 23.3 1.6 -45.1 15.6 5.2 9.4 -9.4Sugar 1.84 Dec-72 266.9 -12.6 -21.5 75.5 -2.0 33.9 51.9Coffee 0.90 Dec-80 47.5 -2.2 -26.2 6.3 4.5 4.2 -12.3Cocoa 0.45 Dec-83 136.3 20.8 26.2 15.0 12.4 23.5 18.7

Livestock

Live Cattle 3.36 Dec-69 167.9 6.3 -21.0 -6.8 -0.9 -4.7 -17.6Feeder Cattle 0.63 Jan-02 121.6 6.4 -21.0 -1.8 -1.5 -6.2 -10.2Lean Hogs 1.79 Dec-75 149.1 -9.2 -37.4 -31.7 6.3 -6.4 -37.9

Total Returns (%)

Note: As of September 30, 2009.



26/27



Exhibit 44: Performance of equity and bond total returns indices through September 30, 2009

Total Returns in USD (%)

30-Sep-09 1-Month 3-Month 12-MonthIndices Level 2007 2008 2009ytd Change Change Change

Equity Indices (Quoted)

US S&P 500 1,733 5.49 (37.00) 19.26 3.73 15.61 (6.91)Canada S&P/TSX Composite 29,868 29.50 (46.44) 49.58 7.59 19.69 (0.44)UK FTSE 100 3,224 9.20 (48.23) 33.42 2.80 18.38 (1.72)France CAC 40 7,173 15.49 (43.27) 28.56 5.81 26.30 2.37Germany DAX 5,675 35.58 (43.31) 24.06 5.78 22.99 1.29Japan Topix 1,120 (5.15) (26.79) 9.26 (1.65) 6.29 1.30HK/China Hang Seng 42,407 43.00 (46.07) 49.68 6.75 14.77 20.75Australia S&P ASX 200 32,870 29.31 (51.12) 67.77 11.22 32.64 21.22Singapore STI 2,873 30.59 (47.12) 60.17 5.41 18.88 20.07

Region (USD)

All Country World Index 460 12.18 (41.85) 29.30 4.62 17.99 0.53The World Index (DM) 3,666 9.57 (40.33) 25.55 4.02 17.57 (1.64)

EAFE 4,724 11.63 (43.06) 29.58 3.85 19.52 3.80Europe 716 15.17 (47.30) 33.75 4.86 23.24 1.81

Emerging Markets (EM) 1,593 39.78 (53.18) 64.88 9.09 21.04 19.44

Country (USD)USA 3,600 6.03 (37.14) 19.90 3.88 15.59 (6.74)Canada 5,025 30.24 (45.15) 49.61 7.28 18.48 0.28France 6,067 14.03 (42.71) 30.37 6.12 26.65 3.80Germany 4,919 35.93 (45.50) 23.86 5.84 23.24 (2.00)Italy 1,272 7.26 (49.20) 31.37 7.33 27.14 1.26Netherlands 12,091 21.14 (47.88) 37.81 8.27 31.29 6.23Spain 5,413 24.69 (40.06) 42.80 5.13 27.53 18.97Switzerland 8,421 6.06 (29.90) 21.94 3.64 22.66 5.70United Kingdom 5,257 8.39 (48.32) 34.02 2.79 18.53 (1.29)Japan 4,125 (4.14) (29.11) 9.41 (1.68) 6.57 (0.43)Hong Kong 32,353 41.20 (51.21) 54.61 8.23 14.41 25.61Singapore 8,194 28.38 (47.34) 58.53 5.79 19.36 16.90China 87 66.24 (50.83) 48.44 4.68 7.86 32.49Korea 456 32.58 (55.07) 68.16 12.06 34.48 23.63

Region

World 843 10.38 10.89 4.12 1.84 5.70 13.29European Union 205 13.98 5.21 7.38 1.93 6.65 11.31G7 813 10.37 13.91 2.23 2.13 4.98 11.37

Country

USA 660 8.64 15.08 (3.14) 1.04 1.97 5.02Canada 1,022 24.54 (10.47) 11.26 0.08 7.48 0.21United Kingdom 1,166 6.93 (18.22) 12.40 (2.03) (0.96) (1.83)France 1,493 13.89 7.60 5.54 1.76 6.10 11.38Germany 1,110 14.19 8.05 4.66 1.78 5.63 10.26Italy 1,523 13.80 1.81 10.42 2.28 7.68 11.95Netherlands 1,178 14.15 6.59 6.37 1.86 6.09 11.12Switzerland 792 7.39 16.95 3.88 1.60 6.38 11.94Japan 833 7.91 30.10 0.41 3.98 7.00 20.07

Citigroup World Government Bond

Indices (USD)

MSCI Equity Indices

Note: As of September 30, 2009.



27/27


Reg AC

We, Allison Nathan, Jeffrey Currie, Janet Kong, David Greely, Samantha Dart and Damien Courvalin, hereby certify that all of the views expressed in

this report accurately reflect our personal views, which have not been influenced by considerations of the firm's business or client relationships.

Disclosures

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