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Goldman Sachs released a report Monday raising their short term forecast for resource-related investments, describing the ongoing slide in commodity prices as overdone. Their longer term commodity price forecasts remain unchanged, however, suggesting they're either advocating only a short term trade, or a malleable wait and see investment strategy. Let's compare recent moves in commodity prices against global economic activity, to assess the sustainability of a potential rally.

In comparing global manufacturing activity (measured by the JP Morgan Manufacturing PMI Index) to commodity prices (see chart), the first thing that stands out is the high probability that commodity prices will correct back to the PMI index when they jump ahead. In the 2004 to 2006 period, manufacturing activity remained flat while commodity prices climbed. Beginning in July of 2006, commodity prices snapped lower to meet back up with slower manufacturing activity.

The same trend is visible in late 2010. The exuberance surrounding the Fed's QE2 (which, in hindsight, was irrational) sent commodity prices spiking higher, but manufacturing activity did not improve. Unfortunately for Canadian investors in resource related stocks, commodity prices again plunged when it became clear that QE2 would not spur the global economy to the extent expected.

Despite Goldman's argument to the contrary, we don't see a commodity rally based on current economic fundamentals. Commodity prices appear in line with global activity. If anything, in year over year terms, global economic growth appears to be flattening and even possibly rolling over.

Conditions could change but, as always, hope is not an investment strategy. Unless global manufacturing improves significantly, investors overweight in resource sectors should use any short term rallies to trim holdings.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.