Many central banks around the world have recently entered the low rate era. Yet inflation is stubborn, rising in many regions and not decreasing at all.
This problem makes many investors concerned, and one of the common questions I hear is whether commodities can still serve as a reliable hedge. After all, when markets are in panic, having something tangible in your portfolio, like oil or gold, can help mentally, but the portfolio benefits are not obvious. The question, then, is whether now is the right time to buy commodities or if other tools provide better protection.
The context that shapes the choice
The phrase “geopolitical uncertainty” seems to appear nearly in every article, but there is a reason behind it. For now, the world is very uncertain indeed, and it is starting to be divided into “risk zones” and “stability zones.” Even in the places considered more or less stable and safe like Europe, more and more disagreements arise. The region is now split even over such small things as the recognition of Palestine or Israel’s participation in Eurovision.
At the same time, the economic conditions are becoming more fragile. The world economy is starting to shrink and recession is clearly looming. The dollar is falling, the United States is on the verge of downshifting, and the world’s second largest economy has already entered the phase of stagnation. In such conditions, expecting commodities to outpace inflation and increase portfolio performance is quite illogical. Although they have been historically considered as a reliable class of assets, the current economic cycle has no reason to see commodities as a way to portfolio growth.
That does not mean abandoning them entirely. Commodities still have a role, but it is less about making all your bets on their price growth. For now, better remain cautious and use only some of the assets as a hedging instrument.
Gold shines the brightest
When it comes to choosing these assets, gold is our timeless safe-haven. The asset feels perfectly fine during the crises and throughout centuries showed resistance and accumulated growth. It’s a natural hedge, that’s why in the current turbulent environment it hovers around the ATH of $3,750. Another factor that makes gold even more appealing is the low-rate environment that historically boosted the price of gold. Recently, the Fed has dropped rates by 25 bps, but given the pressure from the president, the rates will most probably be lowered once again. So the possibility for gold to reach more than $3,800 in this quarter is pretty realistic.
It seems that if gold is considered as a safe-haven asset, the same refers to silver. But it’s not exactly like that, because silver is used more for industrial purposes. Especially when it comes to electric cars and batteries, silver is nearly irreplaceable. However, despite it growing for now, I would be very careful with this metal. The technology market is on the verge of a new breakthrough, but at the same time it is very close to saturation, and the potential for a sharp increase in silver demand is limited. As a result, it is better not to expect any rapid leaps from silver and to pay attention to other asset classes.
Traditional risk assets, such as oil or gas, also struggle to provide some certainty for investors. Oil markets are very sensitive to global conflicts and serve as a barometer for geopolitical risk. If we check the graph of oil prices this year, it will remind us of a rollercoaster, so betting your portfolio on its performance might not be a good choice, at least for now.
Where else to look beyond commodities
If commodities are not the full answer, where can investors find other hedges? Except for gold, a lower-rate environment tends to favour growth-oriented sectors such as technology, which is not a surprise. When rates fall, investors are eager to take more risks, so-called “risk mode” turns on. That’s why big tech stocks are in plus now and also why private equity and venture capital do well — cheap debt makes it easier to fund big ideas. And for industries that rely heavily on financing, like utilities, lower rates simply make running their operations less expensive.
In the end, the role of commodities today is more limited than in previous times. They still provide value, but not as the main source. Gold remains the exception, as proven safe haven, while other assets look more fragile, shaped by industrial demand or geopolitical problems.
By Julia Khandoshko, CEO at the European broker Mind Money
