Macroscope | Why oil and gold look like an expensive insurance policy right now despite market risks
Kerry Craig says while there has been plenty of turbulence to spook investors, a flight to the traditional safe investment havens might be premature
As the twilight of the middle of the business cycle – which charts the rise and fall in world gross domestic product – fades, investors are grappling with how to best position portfolios. Commodities, namely oil and gold, have been classic late cycle plays. While some investors dismiss the use of historical comparisons, given the structural changes in markets and economies this time, history can still prove a useful guide on how these two asset types may perform heading into the next economic downturn.
This year has been a mixed bag for commodities performance. The broad Bloomberg Commodities Index ended the first half of the year pretty much flat, as rising oil prices were offset by declining metal prices.
Although US government bond yields have struggled to break through the 3 per cent barrier, they are well off historical lows. Meanwhile, the yen and Swiss franc, traditional safe havens in periods of stress, are yet to be the recipients of significant inflows.
Why is the gold price falling when the list of risks has never been longer? Gold is often viewed as the ultimate insurance policy against a market catastrophe, and an allocation to gold has been a fairly consistent late cycle trade, living up to its name as the king of metals.