Goldman Sachs says 'gold is a better hedge than oil' as Trump-Iran tensions heat up

  • Goldman Sachs says gold is the better investment compared with oil in times of geopolitical strife. 

  • Oil price "risks are skewed to the downside in coming weeks," the bank said, while "additional escalation in US-Iranian tensions could further boost gold prices."

  • Gold on Monday soared to a 2013 high of about $1,588 an ounce, while oil jumped past $70 a barrel. 

Gold is the asset to buy in times of geopolitical strife, says Goldman Sachs. 

As tensions between the US and Iran ratchet up, oil has spiked along with gold prices as traders fear energy supply disruptions and flock to safe-haven assets.  

Iran on Sunday said it will withdraw from the 2015 nuclear deal, and Trump threatened strikes on cultural sites in the country.

Choosing gold, Goldman says, is the smart move right now.

"Being long gold is a better hedge to such geopolitical risks" compared with oil, Jeffrey Currie, global head of commodities research at Goldman Sachs, and his team wrote in a note titled "Gold is a better hedge than oil."

Gold on Monday soared to a six-year high of about $1,588 an ounce, while oil jumped past $70 a barrel. 

"Spikes in geopolitical tensions lead to higher gold prices when they are severe enough to cause currency debasement," the analysts wrote. "This most often happens during wars or military escalations."

"Gold performed well, even controlling for real rates and dollar weakness, during the beginning of both Gulf wars and during the events of September 11, 2001. Therefore, additional escalation in US-Iranian tensions could further boost gold prices," they said.

Gold has been boosted by a weakening dollar, "higher breakeven inflation" and data showing weaker growth, adding to "concerns of a potential late-cycle inflation overshoot," the bank said.

"Such an overshoot is the economic environment in which gold historically does best."

Oil is 'skewed to the downside'

Oil price "risks are skewed to the downside in coming weeks, with oil prices already trading above our fundamental fair value of $63/bbl ahead of the recent events," the bank wrote.

But, it added: "Additional escalation in US-Iranian tensions could further boost gold prices. All in all, we stick with our three-, six- and 12-month forecast of $1,600/toz but see upside risks if geopolitical tensions worsen."

"The US is becoming less sensitive to oil disruptions and price spikes, as the country became a net petroleum exporter in September for the first time in modern history," Goldman wrote. 

Oil prices have been "buoyed by an over-enthusiastic December risk-on rally in the face of limited evidence of a material acceleration in global growth," the bank's analysts wrote. 

Market Insider - Trista Kelley Jan. 6, 2020, 05:48 AM


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