Market volatility has become a recurring topic recently, driven by multiple factors that contribute to uncertainty for investors. These factors include persistent inflation, the ongoing conflict in Ukraine, and unexpected policy decisions made by the recently elected Trump administration. During economic downturns, investors often turn to safe-haven assets, such as the gold and oil sectors, which are expected to maintain or rise in value.
Historically, these commodities were considered stores of value, and their appeal has increased dramatically during these turbulent times. This rise in demand is reflected in the strong performance of exchange-traded funds (ETFs) such as SPDR gold stocks NYSEARCA:GLD And the American Oil Fund NYSEARCA: UseThis highlights the increasing demand for assets that are perceived as stable during times of change.
Gold: a glimmer of stability in uncertain times
For centuries, gold has served as a store of value and a hedge against inflation and economic uncertainty. Its inherent scarcity, intrinsic value, and historical use as a form of currency have cemented its status as a safe haven. During past crises, such as the 2008 financial collapse, gold has often risen as investors sought to protect their capital.
There are several factors currently driving increased investor interest in precious metals. Persistent inflation continues to erode the purchasing power of fiat currencies, making gold, which is not subject to the same inflationary pressures, an attractive alternative.
Geopolitical risks, including the war in Ukraine and other international tensions, have increased gold’s appeal as a haven from instability. The recent weakness of the US dollar against other major currencies has made gold more accessible to international investors, which could boost demand and prices.
Finally, central bank policies, including interest rate decisions and quantitative easing measures, can also affect gold prices. Some central banks are actively increasing their gold reserves, adding more support to the market.
For investors looking to gain exposure to gold,… SPDR Gold Dividend (GLD) ETF It offers a convenient way to invest in the metal without the complexities of owning and storing physical gold. With an expense ratio of 0.40%, GLD holds physical gold bullion in the form of goods delivery bars in London, with the aim of tracking the performance of the gold market. As of January 13, 2025, the SPDR Gold Shares share price has seen a healthy 29.53% increase over the past year.
Black Gold: Oil Market Rising
In reflection of gold’s fluctuations, oil prices also witnessed significant fluctuations, driven by the complex interaction between supply and demand factors. Supply constraints, exacerbated by declining production from some major oil producers and rising geopolitical tensions, have pushed oil prices higher.
Strict US sanctions on Russia have greatly impacted its oil exports, with analysts estimating a decline of 700,000 to 800,000 barrels per day from the global market. These sanctions target major Russian oil entities such as Gazprom Neft and Surgutneftegas, as well as a large portion of the “shadow fleet” of tankers used to circumvent the restrictions.
Besides sanctions, other geopolitical factors, such as the possibility of renewed sanctions on Iran under the Trump administration, further contribute to supply uncertainty.
While supply concerns dominate the narrative, growing global energy demand also plays an important role. Factors such as China’s ongoing economic recovery and continued industrial activity in other developing countries are fueling this growing demand. Meanwhile, speculative trading in the oil futures market can exacerbate price volatility as traders react quickly to headlines and shifts in market sentiment.
For investors seeking to profit from oil market dynamics, the US Oil Fund (USO) provides an easy way to participate without directly holding oil futures contracts. With an expense ratio of 0.70%, USO primarily invests in near-month crude oil futures contracts traded on the Nymex but also invests in other types of oil, such as diesel heating oil, gasoline and natural gas, depending on market conditions.
It may also use other oil-related investments. The US Oil Fund’s strategy is to track the daily movements of West Texas Intermediate (WTI) oil. As of January 13, 2025, the US Oil Fund’s share price has a one-year return of +20.89%, with a healthy rise of +10.81% in the past month alone.
GLD versus USO: a comparative analysis
Both GLD and USO offer exposure to commodities that are often considered safe havens, but they follow different investment approaches. GLD tracks the actual price of gold, giving investors direct exposure to the precious metal. On the other hand, the USO tracks the price of crude oil futures for a nearby month, which adds complexities and risks due to the futures market. USO returns are affected by the relationship between spot prices and futures prices (contango and lag), which can enhance or reduce their returns.
USO has shown stronger year-to-date gains (8.84%) than GLD (1.49%). However, over the past year, GLD has significantly outperformed USO, with a return of 29.53% compared to USO’s return of 20.89%. Both GLD and USO are exposed to market volatility, but USO carries additional risks due to futures market dynamics. USO also has a higher expense ratio (0.70%) than GLD (0.40%), which could impact net returns over time.
Investing in Uncertainty: A Balanced Perspective on Gold and Oil
Historically, gold and oil are considered safe havens during times of economic instability. Market volatility has pushed investors into these commodities, which is reflected in the strong performance of most of the investment vehicles that track them.
However, predicting future returns is complicated due to many influencing factors. These factors include inflation, geopolitical events, central bank policies, and supply and demand dynamics, all of which will ultimately shape gold and oil prices.
Therefore, a balanced and diversified approach across a range of asset classes is essential for overall portfolio risk management. A well-structured investment strategy should align with your individual risk tolerance, financial goals, and chosen time horizon.
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