For decades, investors have flocked to gold in times of market turbulence and devaluing currencies. Gold remains a safe haven, but has oil now replaced it as the hedge of first choice?
YES, says Tim Price:
Investors watching the ongoing deterioration of government balance sheets thanks to recession and the extraordinary demands of the banking crisis have been increasingly pursuing real assets as currency hedges. Institutions have lately been scouring the world for alternative real assets, including infrastructure and multiple commodities. It was recently accepted wisdom that gold was the 'go to' asset, hedging against financial armageddon and fiat currency debauchment.
But having failed twice to break past the $1,000 (£608) per troy ounce level despite all the impetus that a collapsing global financial system could throw its way, gold's credentials as currency hedge par excellence are looking a little frayed. The threat of central bank sales continues to overhang the metal, and historically high prices are perceived as threatening consumer / jewellery demand. Could there be a more practical alternative?
Oil may well serve as that alternative. Unlike gold, oil has legitimate uses as the exemplar of global trade and the engine of the transportation, energy and heating sectors. And, like gold and other commodities, being denominated in US dollars makes it a useful hedge against further weakness of the greenback.
It is, of course, an open question as to how long it will take for the US dollar to lose its global reserve status. In any event, given a projected US budget deficit of $1.8 trillion for this year alone and a lack of political will to grasp this particular nettle, ongoing secular decline of the dollar seems inevitable.
The sell-off of oil down to $34 a barrel in December undoubtedly reflected the softening in the global economy as the recession bit. Regardless of the speculative overreaction that took oil above $140 last July, oil is a fairer proxy for the state of global trade and a likely beneficiary of the economic recovery, as and when it comes. While gold could easily lag in the context of renewed global growth, that growth could yet come at the expense of an over-issued, overburdened dollar. Oil should benefit from both outcomes.
Tim Price is Director of Investment at PFP Wealth Management.
NO, says Charles Gibson:
Not only has oil not replaced gold as the 'anti-dollar' hedge, but it cannot. There is no doubting that oil has certain anti-dollar qualities, but no more so than any other real asset priced in US dollars. Insofar as its supporters might argue that oil is supplanting gold as an anti-dollar hedge, one might just as well argue that copper, nickel, pork bellies or soyabeans are replacing it. But while all have certain anti-dollar characteristics and may be expected to rise in inverse relationship to the dollar, this is merely a function of the currency in which that commodity is priced.
This is true of gold as well, of course, but there are additional reasons why gold may be considered a special case. Chief amongst these is the fact that it is a reserve bank asset. Critics will argue that this is an historical anachronism, dating back to the gold standard. That is arguably true. Nevertheless, it is also a contemporary reality. As such, the US Federal Reserve in particular has at its disposal some 8,000 tonnes (approx 260 million ounces) of gold, worth $247 billion, with which to settle the United States' external liabilities.
Moreover, gold makes up a far higher proportion of the United States' total reserves than for other countries – approximately 75 per cent at market rates compared to a worldwide average of around 10 per cent. This is more than any other country in the world in both absolute and relative terms and is a substantial reason why the US dollar has been the world’s reserve currency since 1945.
What's more, it is one of the few assets that is not someone else’s liability. The US does not by contrast possess comparable holdings of copper, nickel or soyabeans and, in as much as it does possess a strategic reserve of oil, that is earmarked for emergency domestic consumption, rather than as a unit of currency. As a formal reserve asset, gold’s relationship to the dollar is therefore more than simply the inverse relationship of a dollar-denominated commodity.
Charles Gibson is head of mining research at Edison Investment Research
WHAT DO YOU THINK?
Is oil the new best hedge against inflation and currency devaluation or does gold remain the safe haven asset of first choice? Leave your comments below - we'll use the best ones in the magazine!