Geopolitics Rising geopolitical risks underline the value of hedging

Benny Gantz, a minister in the war cabinet, said that Israel will “exact a price from Iran in a way and time that suits us.” Markets will be hoping that any countermeasures are sufficiently restrained to avoid the risk of a further escalation.

Safe-haven assets came off recent highs on Monday. Gold was trading below Friday's intraday record level of USD 2,431. Brent crude, which has been the focus of worries that the conflict could disrupt oil production, also fell from Friday's high above USD 92. A rally in US Treasuries also went into reverse, with the yield on the 10-year bond edging higher at the start of the week.

But with events in the region still fluid, we believe the recent escalation has highlighted the value of risk-mitigation strategies. We have underlined the appeal of gold and oil in the event of heightened geopolitical risks, and this remains the case. We also believe both commodities are supported by strong fundamentals. On oil, resilient US growth has been positive for energy demand, which has been broadly better than expected for the OECD overall—especially on the European periphery. With OPEC+ nations set to remain disciplined on production, we continue to expect an undersupplied market.

On gold, we expect investors to resume purchases of exchange-traded funds as they anticipate Fed cuts this year. Central bank buying should remain strong amid concerns over US dollar-based sanctions.

Takeaway: We advise investors consider a range of risk-mitigation strategies, starting with diversification by geography, asset class, sector, and security. Gold and oil have performed well in recent weeks, and we would expect prices to continue rising if geopolitical risks carry on escalating. Systematic allocation strategies and structured strategies may also prove helpful risk management tools.

Main contributor - Mark Haefele

Original report - Geopolitical and economic risks resurface, 15 April 2024.