Oil and gold are hardly correlated. This offers investors the opportunity not only to hedge for many scenarios, but even to make profits.
It doesn’t all fit together at the moment: here are the supporters of the MMT (Modern Monetary Theory), according to which the state can print as much money as it needs, because a sideways trending gold price. Here attacks on tankers near the Strait of Hormuz, as an oil price that falls rather than rises. In fact, the current mix is far from easy to analyze in order to build perfect decisions on it. Therefore, it is important to know the possible influencing factors and to relate them to each other. In this way, scenarios can be developed and strategies can be developed that cover the widest possible spectrum.
But you can never be sure of yourself in the extremely complex world. In addition to normal business cycles and natural influences, decisions made by state leaders with at least narcissistic traits sometimes create extreme uncertainties. Out of nowhere, a trade war with a recession scenario can arise so quickly.
It is good to hear an optimistic opinion.
“The latest figures signal that world trade will return to its trend growth of four percent in the summer,” Andreas Rees, chief economist at Unicredit Germany, writes in his latest analysis. Rees is based on his house’s global leading indicator, which in May recorded its biggest increase in more than seven years. “However, political uncertainty could still have a dampening effect in the future,” the economist said. Again, it boils down to scenarios.
But how can investors position themselves on different scenarios of geopolitics and the global economy? Basic scaffolding are vehicles that develop in a contrary way. Two easy-to-use assets are gold and oil. The prices of these two raw materials have almost no correlation. In addition, gold is negatively correlated with the main stock markets as well as long-term interest rates. Oil, on the other hand, is slightly positively correlated with these markets. This means, at least in theory, that if the Dax falls, the price of gold rises, and the oil quotation comes under only a slight pressure. Thus, investors can build an investment system independent of the stock markets, which should produce a positive return, at least in most cases.
Scenario 1
There is a strong financial crisis followed by recession and extremely loose monetary policy. Opec (Organization of Petroleum Exporting Countries) and its allies are holding back on further support for the oil price. The price of oil would then come under severe pressure. However, the price of gold could surpass the all-time high. At 2000 dollars per ounce, a negative total return would also remain. But the gold experts at Incrementum in Liechtenstein even give gold potential up to 5000 US dollars. Then the overall return of the oil-gold combination would again be positive.
Scenario 2
The geopolitical crises are escalating, and there are even wars between Iran and the US. In this case, it would be the price of oil that is overshooting and could well reach USD 120 per barrel. In addition, gold would hold very well above today’s level. A return of around 50 percent would be conceivable.
Scenario 3
The trade dispute between the US and China is widening and the global recession is taking place. Opec, however, is intervening to prop up the price of oil. A case well below the 50-dollar mark could be avoided in this way. The price of gold, on the other hand, would probably rise, indicating the risks of sovereign and corporate failures.
Scenario 4
An agreement in the trade dispute between China and the US calms the minds and, above all, the stock exchanges. This stimulates the mood of decision-makers and leads to a global economic recovery. Gold is used less as a hedge at such a stage. The price of the precious metal is falling significantly. In the longer term, increased demand will be supported, especially in emerging countries such as China and India. Oil, on the other hand, holds up very well from the outset because of rising demand.
Scenario 5
The geopolitical uncertainty remains due to the constant skirmishes between US President Donald Trump and Beijing and Tehran. But monetary policy, which is easing again, is keeping the economy going well. This would mean, on the one hand, a rising price of gold to hedge against possible inflationary tendencies and the risk of a weaker US dollar. Oil, on the other hand, is in demand and increases slightly in price.
What to do? A combination of gold and oil seems a good alternative. Certainly, the prices of the two commodities cannot be predicted with certainty. But the trend is likely to move in the direction expected, at least in the longer term. What returns would then be expected from this combination is shown in the table below as an example. If the price of oil and gold were to be unimpressed by geopolitical developments and remain at current levels, even then a “sideways return” of 9.5 percent would emerge.
Correlations offer a hedging opportunity: the lower asset classes correlate, the lower the overall risk can be represented in the portfolio. The correlation is set from 1.0 (equal) to -1.0 (absolutely contrary behavior). At zero, the asset classes move independently of each other. The correlation may well change over time. This brings additional difficulties in the assessment.
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