The best hedge against geopolitical conflicts: crude oil, gold or yen?

Changes in the situation in the Middle East have disturbed the global financial market at all times, and yesterday the media said that Israel was determined to hit back against Iran, US stocks, bitcoin dived, and gold rose. Gold prices approached a record high set last week, rising 1.76% at one point above $2,385 an ounce.

The three major U.S. stock indexes turned down intraday overnight, with the Nasdaq closing down 1.8%, the S&P falling more than 1% on both days, the biggest two-day decline since the collapse of Silicon Valley Bank, and the Dow Jones falling for six consecutive days.

On April 15, a team led by Citibank analyst Dirk Willer noted in a recently released report that the Iran-Israel conflict is unlikely to escalate in the near term, the risk of a sharp rise in oil prices is low, and if oil prices do not soar, global markets may soon return to Fed-themed trading mode.

But if the conflict unexpectedly escalates, Citi believes that gold and the Japanese yen may be better hedging options when investor risk aversion rises rapidly:

The most effective hedging tools are usually those whose market positioning is biased in the "wrong" direction, and in the current environment, it may be better to go short USDJPY rather than long CHF.

Gold is often seen as a safe-haven asset and tends to perform well during periods of rising geopolitical uncertainty. Therefore, increasing exposure to gold can also be used as a hedging strategy for a portfolio. If the conflict escalates and the central bank buys gold, the price could rise to US$3,000 an ounce earlier.

As for the trend of crude oil prices, Citi believes that the current crude oil market has already priced in some of the risk premiums, and raised its short-term oil price forecast from $80 to $88. If tensions escalate significantly, oil prices could rise to around $100, but this is not a base case scenario.

Goldman Sachs believes that the current oil price contains a premium of about $5-10 per barrel, and if oil transportation in the Strait of Hormuz is blocked, oil prices will rise by 20% in the first month, and if the disruption lasts for several months, oil prices could double.

Citi: Gold and the Japanese yen would be good options for hedging risk

Citi believes that while the situation is uncertain and the situation could change quickly, key signals indicate that the likelihood of escalation is not high. The main channel through which the conflict in the Middle East translates into a global macro event tends to be a sharp rise in oil prices, and the current risk of a sharp rise in oil prices is low, and global markets should refocus on the Fed's monetary policy.

But if tensions escalate further and Iran's oil production is at risk, the resulting surge in oil prices will mean that the conflict in the Middle East will become more important for global macro assets, and risk assets will come under pressure, and the market will tend to look for assets that can be risk-averse, and from a fundamental point of view, in a typical hedging tool, it is more inclined to go long the yen rather than the Swiss franc. At the same time, long gold is also an option:

Heightened geopolitical tensions are likely to further support gold prices through safe-haven demand and demand from emerging market central banks. In a bull market scenario, we expect gold to rise to US$3,000 an ounce by 2025, with a clear escalation of the conflict likely to accelerate the process.

Gold prices have surged to record levels in recent weeks, despite a sharp rise in nominal and real interest rates and a more hawkish pricing of Fed funds rate futures. A combination of factors such as geopolitical hedging, demand for alternative fiat currencies and strong physical demand have pushed gold prices higher in recent months.

Tensions in the Middle East could spur a long-term trend of emerging-market governments to buy gold in order to diversify their reserves.

The yen hit its lowest level since 1990 against the dollar for five consecutive sessions, and has fallen more than 8% year-to-date to around 154 yen, surpassing the level that some analysts have warned could trigger direct intervention in Japan, and analysts say a big reason for this situation is that recent strong economic data from the United States signals that the Federal Reserve is delaying interest rate cuts.

Bank of Japan officials had previously warned that they were ready to take action to prop up the yen if necessary. While the Bank of Japan abandoned its negative interest rate policy last month, it did little to support the yen as interest rates remain well below those in the United States.

Some analysts have pointed out that the "safe-haven attribute" of the yen is the result of the combined effect of loose money factors and arbitrage transactions in the capital market. Japan's long-term low inflation relative to Western countries has led to a highly sustained low-interest monetary policy that has led to its main reason for attracting foreign capital to invest in its currency during the economic crisis.

However, many analysts pointed out that considering the limited room for the Bank of Japan to raise interest rates, the interest rate differential between the United States and Japan may remain high for a long time, and the potential upside of the yen exchange rate is limited, so the yen's "safe-haven" status has been greatly challenged.

Citi: Oil prices may fall in the second half of this year

Citi believes that crude oil prices have now included the expectation of continued tensions, raising the crude oil price forecast from $80 to $88 per barrel, and expects oil prices to fall back to the $70-80 range by the third quarter of 2024 if the situation eases. In the event of a clear escalation, oil prices could approach $100, but this is not the base scenario:

Tensions in the Middle East will remain elevated, supporting higher oil prices. The near-term oil price forecast has been raised, with the spot price forecast for Brent crude oil in 0-3 months raised from $80 to $88 per barrel, and the average price in the second quarter of 2024 raised from $78 to $86 per barrel.

The market is now pricing in the ongoing tensions in the Middle East in the second quarter at the $85-$90/b level. If the situation eases in the third quarter, oil prices could quickly fall back into the $70-$80/b range.

If the situation continues to escalate, oil prices could rise above $100 per barrel. It could increase the risk of Iran's partial or temporary closure of the Strait of Hormuz, or lead to Iranian attacks on oil facilities in the Gulf, which could further push oil prices higher.

Since the beginning of this year, as tensions in the Middle East have intensified, the world's two largest energy futures - WTI crude oil and Brent crude oil have risen sharply, and the global benchmark Brent crude oil briefly exceeded $92 a barrel last week, jumping to the highest level since October last year.

Colin Cieszynski, portfolio manager and chief market strategist at SIA Wealth Management, said in an interview with the media that crude oil rose sharply on Friday, while Iran's actions over the weekend "haven't really led to an escalation so far" and the market saw some short-term profit-taking.

Goldman Sachs believes that while the geopolitical risk premium (the compensation that investors are asking for for the risk that geopolitical shocks could reduce oil supply) is difficult to judge accurately, based on the pricing framework and hedging costs, a rough estimate of the current price contains a premium of about $5-10/b, which means that the market sees a 15% probability of a 4 million b/d reduction in supply over the next 12 months or 8 million b/d in the next 6 months, and an 85% probability in the baseline scenario without supply disruptions:

Following the Brent crude oil price just topped $90 per barrel and the International Energy Agency (IEA) released higher-than-expected inventory data on Friday, our pricing framework suggests that the difference between the Brent 1-month futures price and the 36-month futures price (i.e., the 1/36 spread) is about $10/b higher than the model forecast.

Goldman Sachs said that although the current probability of a disruption in the supply of oil in the Strait of Hormuz remains low, if oil transportation in the Strait of Hormuz, which currently accounts for 17% of global oil production, is blocked, oil prices will rise by 20% in the first month, and if the disruption lasts for several months, oil prices could double.

This article is from Wall Street News, welcome to download the APP to see more