Investors Navigate Uncertainty by Seeking Refuge in Gold and Oil

Key Points

• Gold's inherent value and historical role as a safe haven asset make it an attractive investment option during periods of economic instability.
• Increased global demand for energy and supply chain disruptions are significantly impacting oil prices, creating attractive opportunities for investors.
• Exchange-traded funds offer convenient and relatively low-cost access to the gold and oil markets for investors of all experience levels.

 

Market volatility has become a recurring theme lately, driven by multiple factors that contribute to investor uncertainty. These factors include persistent inflation, the ongoing conflict in Ukraine, and the unpredictable policy decisions of the recently elected Trump administration. During economic downturns, investors frequently turn to safe-haven assets, such as the gold and oil sectors, which are expected to maintain their value or appreciate in value.

These commodities have historically been considered stores of value, and their appeal has grown considerably during these uncertain times. This surge in demand is reflected in the strong performance of exchange-traded funds (ETFs) like the SPDR Gold Shares NYSEARCA: GLD and the United States Oil Fund NYSEARCA: USO, highlighting the growing appetite for assets 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 meltdown, gold often rallied as investors sought to protect their capital. 

Several factors are currently driving increased investor interest in the precious metal. 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 further heightened gold's appeal as a haven from instability. The recent weakening of the US dollar against other major currencies has made gold more affordable for international investors, potentially boosting demand and prices.

Finally, central bank policies, including interest rate decisions and quantitative easing measures, can also influence gold prices. Some central banks have been actively increasing their gold reserves, adding further support to the market. 

For investors looking to gain exposure to gold, the SPDR Gold Shares (GLD)ETF 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 London Good Delivery bars, aiming to track the performance of the gold market. As of January 13, 2025, SPDR Gold Shares share price has seen a healthy 29.53% increase over the past year. 

Black Gold: The Oil Market's Rally

Mirroring gold's volatility, oil prices have also experienced significant fluctuations, driven by a complex interplay of supply and demand factors. Supply constraints, exacerbated by reduced production from some major oil producers and heightened geopolitical tensions, have propelled oil prices upward.

The stricter U.S. sanctions imposed on Russia have significantly impacted its oil exports, with analysts estimating a reduction of 700,000 to 800,000 barrels per day removed from the global market. These sanctions target key Russian oil entities like Gazprom Neft and Surgutneftegas, as well as a substantial portion of the "shadow fleet" of tankers used to circumvent restrictions.

Beyond sanctions, other geopolitical factors, such as the potential for renewed sanctions on Iran under the Trump administration, further contribute to supply uncertainty.

While supply concerns dominate the narrative, increasing global energy demand also plays a significant role. Factors like the continued economic recovery in China and persistent industrial activity in other developing nations fuel this growing demand. Meanwhile, speculative trading in the oil futures market can exacerbate price swings as traders react quickly to headlines and shifts in market sentiment.

For investors seeking to capitalize on the oil market's dynamics, the United States Oil Fund (USO) offers an accessible 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 oil types, such as diesel-heating oil, gasoline, and natural gas, depending on market conditions.

It may also use other oil-related investments. United States Oil Fund’s strategy is to track the daily movements of West Texas Intermediate (WTI) crude oil. As of January 13, 2025, the United States Oil Fund’s share price boasts a one-year return of +20.89%, with a healthy +10.81% surge in the past month alone. 

GLD vs. USO: A Comparative Analysis

GLD and USO both offer exposure to commodities often considered safe havens, but they take different investment approaches. GLD tracks the price of physical gold, giving investors direct exposure to the precious metal. USO, on the other hand, tracks the price of near-month crude oil futures contracts, which adds complexities and risks due to the futures market. USO's returns are influenced by the relationship between spot prices and futures prices (contango and backwardation), which can either boost or detract from its returns.

USO has shown stronger year-to-date gains (8.84%) compared to GLD (1.49%). Over the past year, however, GLD has significantly outperformed USO, with a 29.53% return compared to USO's 20.89%. Both GLD and USO are exposed to market volatility, but USO carries additional risks due to the dynamics of the futures market. USO also has a higher expense ratio (0.70%) than GLD (0.40%), which can impact net returns over time.

Investing for Uncertainty: A Balanced Perspective on Gold and Oil

Gold and oil have historically been considered safe havens during times of economic instability. Market fluctuations have led investors to these commodities, which is reflected in the strong performance of most investment vehicles that track them.

However, predicting future returns is complicated due to a multitude of influencing factors. These include inflation, geopolitical events, central bank policies, and supply-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 managing overall portfolio risk. A well-structured investment strategy should be aligned with individual risk tolerance, financial objectives, and your chosen time horizon.