While gold has rallied by about 15% thus far this year and is trading at a six-year high, the commodity has been a crisis hedge for thousands of years. We have increased positions as we seek increased protection in multi-asset portfolios. We also like hedge funds which employ low volatility strategies and hold their own in bear markets, such as Merger Arbitrage.
OPEC+ seek to support oil prices The Organisation of Petroleum Exporting Countries (OPEC) and major allies such as Russia decided in late June to keep output limits in place for another 9 months, reducing production by 1.2 million barrels per day (mb/d). These quotas are designed to keep oil prices high, especially as output disruptions in Venezuela and US-imposed sanctions on Iran have already removed some 2mb/d from global supply over the last twelve months.
However, in recent years US oil production has surged ever higher, from 8.9mb/d in January 2017 to 12.2mb/d in June this year making the US the world’s single largest source of oil. There are some signs of reduced investment in exploration and production – the number of oil rigs is down from 880 last autumn to 780 at present – but so far US output has remained resilient. We still expect Brent prices to be around today’s level, between $60 and $70, over the next twelve months.
Gold After a 15% rally this year, gold prices have reached $1,480, the highest since 2013. A number of factors have contributed to this move: With trade wars and Brexit just two of a number of risks that have spoked of late, safe-havens have become sought-after;
• around 70% of developed world bonds are trading with negative real yields making non-yielding assets like gold more attractive, as does the Fed’s dovish shift towards lower rates; • demand has been robust – so far this year, gold-backed funds have seen 108 tonnes (t) of inflows, central banks have bought 247t and traders have held long positions of 369t on average; and • gold supply has stagnated so far this year with only modest growth from mine production.
These underpin our decision to increase our positions to gold. However, our primary motivation in multi-asset portfolios to diversify away from equity risk, particularly as government bonds – the first avenue of diversification –are increasingly expensive.
Hedge funds: Prefer Merger Arbitrage type strategies Hedge funds can help in unstable market conditions, but selectivity is key. We prefer strategies which hold their own in bear markets, such as Merger Arbitrage. These strategies provide relatively safe, uncorrelated sources of returns from equities, our most significant allocation across balanced and growth multi-asset strategies. These investments have been a positive contributor of returns – and lowered risk – especially during a volatile Q4 2018.
We prefer low volatility strategies which hold their own in bear markets, such as Merger Arbitrage.
While it has rallied by about 15% thus far this year and is trading at a six-year high, the commodity has been a crisis hedge for thousands of years. We have increased positions as we seek increased protection in multi-asset portfolios.
Expect global demand to soften as growth slows, keeping a cap on upside in oil prices. We expect Brent to remain between $60-70/b.
Source: Kleinwort Hambros 07/08/2019 *Duration: short = Up to 5 years, medium = 5-7 years, long = 7+ years
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.