This round of Middle East "black swan", crude oil and gold are the best hedges

The "black swan" of the Middle East has fallen, among the three traditional safe-haven assets, crude oil and gold have played a stable role and rising, and only U.S. bonds have "fallen" endlessly, which has not played a good role in hedging risks.

Overnight, crude oil and gold continued to rise sharply.

Brent crude and WTI both rose more than 2 percent to above $93 and $89 a barrel, respectively. Since the outbreak of new hostilities between Israel and Hamas on October 6, oil prices have risen sharply, with Brent crude and WTI crude up $8 and $10, respectively.

Gold prices rose even more sharply. Spot gold rose 1.4 percent on Thursday to a new three-month high. Over the past two weeks, the cumulative increase has exceeded $162. As of press time, spot gold was trading at $1976.42 an ounce.

Sean Lusk, co-head of commercial hedging at Walsh Trading, told the media that in this scenario, he expects gold prices to continue to rise regardless of the movement of bond yields, while crude oil will provide an additional boost for gold.

Lusk expects gold to rise above $2,100, 6% above current trading levels.

Crude oil and gold may be the best hedge

Lusk said the Palestinian-Israeli conflict has pushed up gold prices and the movement of Treasury yields does not matter.

This is a major market impact of the "black swan" event, plus another looming debt ceiling issue, but we do not yet have the Speaker of the House (which has remained "leaderless" since the ouster of Speaker McCarthy in early October).

So it also reflects geopolitics and Washington's political farce, and it shows no signs of ending.

Gold may be getting too much attention at the moment, but futures contracts suggest it will continue to rise next year, he said.

We've seen early gains close to $2,000 or even slightly higher, but none of them have been followed up.

But if you look at the futures price curve in the market, it's very strong. The December contract is at $1962, and each month after that the contract has a difference of $20 premium, December, February, April and June. So the outlook is that the trading price will be higher over time.

Lusk added that seasonality is no longer important in the current environment, and while the wedding season, Diwali and Valentine's Day may provide short-term support for gold, they are now in the shadow of macroeconomic trends and geopolitical events.

On key indicators, the U.S. economic situation continues to deteriorate, he said, noting that last week's latest CPI, PPI inflation data, as well as Wednesday's retail sales figures, all showed a pick-up in inflation.

Given global events and the runaway situation in Washington, it is very likely that the S&P 500 will fall to 4,000 and the Dow to 32,000 or 31,000.

You see gasoline and energy prices rising, and credit cards are coming to their limits. Consumer savings are almost exhausted. While the job market is generally stable, strikes are everywhere, led by the United Auto Workers, and the resulting wage growth may be too fast and too high. These are all inflationary factors.

So if that's not the perfect storm for gold or safe-haven assets, I'm not sure what counts.

We saw [gold] rise to $1,946 last week, retreat $25, and then hit a new high. So from that point of view, it's bullish.

What I can see is that gold will be closer to $2100. If you draw a line, connect the three-month highs since the pandemic, $2,063, $2,078 and $2,085. Connect the three dots into a line, and it might just point there ($2,100), slightly beyond that point. That's where I think it's going, if the situation stays the same.

Lusk said the current relationship between oil and gold will also help support precious metals. He said:

This will drive inflation and boost various assets.

He believes that as long as Iran intervenes or Israel decides to strike Iran, oil prices could easily explode to $120 or $130.

Of course, it's hard to say whether they'll do it, and there seems to be a lot of trouble to deal with at the moment, but I can fully see that happening.

In such an environment, he said oil prices would be unsustainable despite geopolitical concerns if stocks fell further. He said:

If the stock market crashes, anything is possible. I think metals could perform better because they will have less to lose.

Lusk said gold is currently well positioned to ride the recent wave of rising oil prices and safe-haven demand. He said:

They've risen together before, and that's not unusual. But if oil collapses, the reason for the crash is that inflation is not yet under control and economic activity is weakening.