Investors turn to gold and oil amid market uncertainty News ad

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

These products have historically been considered stores of value, and their appeal has increased significantly during these uncertain times. This surge in demand is reflected in the strong performance of exchange-traded funds (ETFs) such as SPDR Gold Shares. NYSEARCA:GLD and the US Oil Fund NYSEARCA: USAGEhighlighting the growing appetite for assets that are perceived as stable in times of change.

Gold: A Glimpse 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 rarity, intrinsic value, and historical use as currency have bolstered its status as a safe haven. During past crises, such as the 2008 financial crisis, gold often rose in price as investors sought to protect their capital.

Currently, several factors are causing 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 war in Ukraine and other international tensions, have further increased gold’s appeal as a refuge from instability. The recent weakening of the US dollar against other major currencies has made gold more accessible to international investors, potentially increasing demand and prices.

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

For investors looking to gain exposure to gold, SPDR Gold Shares (GLD)ETF offers a convenient way to invest in the metal without the hassle 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 in an effort to track gold market dynamics. As of January 13, 2025, SPDR Gold Shares’ share price is up 29.53% year-to-date.

Black gold: oil market rally

Reflecting gold’s volatility, oil prices have also experienced significant fluctuations driven by the complex interplay of supply and demand factors. Supply constraints, exacerbated by production cuts by some major oil producers and rising geopolitical tensions, have pushed oil prices higher.

Stricter US sanctions imposed on Russia have significantly impacted its oil exports, with analysts estimating a reduction of 700,000 to 800,000 barrels per day from the global market. These sanctions target key Russian oil companies such as Gazprom Neft and Surgutneftegaz, as well as a large part of the “shadow fleet” of tankers used to circumvent restrictions.

In addition to sanctions, other geopolitical factors, such as the possibility of renewed sanctions on Iran under the Trump administration, further contribute to supply uncertainty.

While supply issues dominate the narrative, rising global energy demand also plays a major role. Factors such as the ongoing economic recovery in China and continued industrial activity in other developing countries are fueling this growing demand. Meanwhile, speculative trading in the oil futures market could exacerbate price swings as traders quickly react to news headlines and changes in market sentiment.

For investors looking to benefit from oil market dynamics, the United States Oil Fund (USO) offers an affordable way to participate without directly owning 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 crude oils such as diesel, 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) crude oil. As of January 13, 2025, the US Oil Fund share price boasts an annual return of +20.89%, with an increase of +10.81% in the last month alone.

GLD vs USO: Comparative Analysis

GLD and USO offer exposure to commodities that are often considered safe havens, but they take different investment approaches. GLD tracks the price of physical gold, giving investors direct access to the precious metal. USO, on the other hand, tracks the price of the month’s nearest crude oil futures contracts, which adds complexity and risk due to the futures market. USO’s return is affected by the relationship between spot prices and futures prices (contango and backwardation), which can either increase or decrease its return.

USO has shown stronger year-to-date growth (8.84%) compared to GLD (1.49%). However, over the past year, GLD has significantly outperformed USO with a return of 29.53% compared to USO’s 20.89%. Both GLD and USO are subject 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 can impact the bottom line over time.

Investing in Uncertainty: A Balanced View of Gold and Oil

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

However, forecasting future earnings is difficult due to many influencing factors. These 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 different asset classes is essential to managing overall portfolio risk. A well-structured investment strategy should be tailored to your individual risk tolerance, financial goals, and your chosen time horizon.

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