Gold and oil, heads and tails, black and white, night and day, Cain and Abel, Tom and Jerry. Yep, I’m labouring the point, but the two commodities have proved to be polar opposites, gold the classic ‘risk off’ asset, oil the classic ‘risk on’.

Having fallen from nearly US$70/bl in January to US$20/bl at its trough (famously to minus US$35 for just one day in the case of US WTI) oil then confounded all predictions by charging back to US$40/bl in June following renewed confidence in rebounding economies and supply constraints by OPEC and Russia. Nevertheless, the oil patch still looks a very sickly place as many US shale drillers are not profitable at these levels and distressed debt in US energy is at horrific levels. The Saudis have had to bring in harsh austerity measures and the Russian economy is on its knees. With global demand a long way from being rebuilt, the ever-falling cost of renewables, and the producers all itching to pump again there is a strong case that oil is in long-term over-supply and I suspect there’s not a lot of upside in the oil price above US$40/bl. The other side of the low oil price coin is that bad as it is for producers, the impact of cheap energy is unambiguously good for economic growth and disposable incomes in the energy consuming nations, particularly in the US, where it is lowly taxed.

We’ve always been rather dubious about holding gold, seeing it as a speculative asset due to its lack of a valuation metric. However, as the great economist John Maynard Keynes famously said, ‘When the facts change, I change my mind’ and post pandemic we are now in a very different investing environment. Deflationary periods of very low bond yields and negative real interest rates (inflation higher than interest rates) favour holding gold as there is no lost ‘opportunity cost’ and it is the classic ‘risk off’ asset in times of geopolitical turmoil. A famous cliché is “Put 5% of your net worth in gold and hope it doesn’t go up” and we would like to do this but timing is everything as gold can be a very volatile asset class, not least for sterling-based investors as it is denominated in US dollars. We added a gold mining fund to high risk/reward Model Portfolios in April and rely on our friends at Troy and Ruffer to hold physical gold in our lower risk/reward Model Portfolios.

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