Should you invest in gold or oil? | Ask the experts




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All over the world, economies are struggling with stagnant economic activity and rising inflation. This has led the World Bank to conclude that the world is headed for 1970s-style stagnation. Some economists even worry that stagflationary conditions coexist with a 2008 style debt crisis. During the 1970s, although stocks and bonds had positive returns, those returns were eaten away by inflation. In periods of rising inflation, by definition, the value of real assets increases. In the 1970s, the S&P Goldman Sachs Commodity Index rose 21% annually throughout the decade. As stocks and bonds continue to fall, investors are weighing whether they should invest in gold, the best-performing asset since the 1970s, or oil, another stagflation performer.

Gold in the 70s

In the 1970s, gold rose 1346% from $35.17 per ounce at the beginning of the year to $512 per ounce at the end of the year.

Source: World Gold Council

Although gold has yet to hit its stride, that shouldn’t worry investors. In the 2008 debt crisis, for example, gold fell 15% at the start of the year, before recovering in November of that year and continuing a run that ended in September 2011, giving investors a return of 140% for the period. What is important right now is for investors to have some exposure to gold.

Oil in the 70s

The 1970s are often remembered for the OPEC oil embargo, and during the 1970s, the price of oil increased by 870%.

Source: Economic data from the Federal Reserve (FRED)

Oil is up more than 31% year-to-date.

Diversify

Gold is, historically, the better coverage in the face of stagflationary conditions, followed by the S&P Goldman Sachs commodity index, which is up more than 29% since last year.

Source: World Gold Council

We do not have data on the instruments that investors could have used during the 1970s to hold oil. Today, however, investors have access to exchange-traded funds (ETFs) that invest in physical oil through futures and options. Many, if not all, have matched or far exceeded oil price gains.

Diversification means not putting all your eggs in one basket. Therefore, an investor should have a number of inflation hedges in their portfolio, investing not only in gold, but also in oil, and in the S&P Goldman Sachs Commodity Index, although an investor could invest in the S&P Goldman Sachs Commodity Index and gold. , given that oil is part of the index. The important thing is to achieve a certain level of diversification. Then if one of the safe havens from stagflation didn’t work out, you’d have something to fall back on.

Finally, investors should keep an eye on the broader market. We don’t know how long the stagflation will last. There is reason to believe that stagnation will don’t last that long as he did in the seventies. This means that investors will need to have a more dynamic and flexible strategy to accommodate what may be a much more fluid period. The key will be whether or not the inflation is simply a response to the pent-up demand of the pandemic era, in which case this phase will end in a few years, or whether the fiscal support and monetary policy of the government have fueled an era of inflation, in this case, stagflation will remain for a while. Inflation figures should be watched closely.

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Jennifer Ahdout

Jennifer Ahdout

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