Time to Hedge Your Bets With This Asset
It’s only four days into the new year and already geopolitical tensions are spiking.
Thursday night we learned President Trump directed the U.S. military to conduct a drone strike that killed a top Iranian general outside of Baghdad airport.
The strike was condemned by Iranian and Iraqi officials and has sent the Middle East region into fervent protests and uncertainty.
Markets reacted violently yesterday morning. Premarket all the major indexes were down nearly 1%.
But as the day wore on buyers stepped back in and the indexes started to recover some losses by midday.
This action could indicate two things.
Is Volatility the New Normal?
For starters, it’s time to consider the idea that volatility is the new norm.
But not to worry, this could actually be a good thing…
Normally, we would expect an event like Thursday night’s attack to have a much larger impact on stocks, but a mere half a point drop through noon yesterday tells me markets are a lot more resilient to headline damage than they have ever been.
The VIX, commonly known as Wall Street’s fear gauge, is still sitting at relatively normal levels despite the attack.
And the major indexes’ ability to absorb geopolitical events like a pending hot war between the U.S. and Iran suggests that U.S. markets are still quite strong.
That said, we also have to acknowledge that we are living in a very unpredictable world, with very unpredictable leaders driving the bus.
Which leads me to my second point.
It Pays to Always Have a Hedge
As stocks dipped Friday, oil and gold both spiked. When headline risk takes hold (even in our new volatile norm) traditional defensive hedges and commodities directly impacted by geopolitical events fall into favor.
Oil, highlighted by the West Texas Intermediate and Brent Crude indexes, rose as much as 4% in intraday trading.
The rise in oil could be a flash-in-the-pan gain, however. A few months ago we saw another drone attack cripple Saudi oil production by knocking millions of barrels out of the supply chain. Oil prices initially saw a huge spike but just days later prices had returned to previous levels.
This could mean that yesterday’s spike in oil prices will be short-lived. Unless we see more retaliatory attacks or we actually enter a hot war with Iran, which would inherently disrupt the world’s oil supply, causing prices to spike significantly.
If this scenario does play out look no further than our previously suggested Permian Basin oil companies. These firms are much more insulated from the chaos in the Middle East and will only thrive off of higher oil prices and better margins.
That said, I’m tracking a spike in another commodity from Friday too.
Your Best Hedge Still Is…
Gold is the world’s premier hedge against uncertainty.
Gold gained nearly two points by midday Friday. The prevailing wisdom suggests that as two of the world’s foremost military powers inch toward war the yellow metal is once again becoming an enticing safe haven.
But gold has a lot more going for it than the current geopolitical uncertainty.
Fundamental factors are aligned nicely in support of higher prices for gold. Plus, seasonal trends turn favorable for gold and silver from December–February, and here we are.
Additionally from a technical standpoint we finally saw gold break out of its slump to the upside this December.
The bull case for gold today gets even better. Other technical data convince me this move could be a big one.
That’s because a rise in gold prices is well supported by:
- A bullish uptrend in price momentum.
- Consistently positive money inflows.
- A strong upside breakout in buying power!
Add Friday’s geopolitical upheaval to the mix and you have the recipe for much higher gold prices.
And that’s a bullish buy signal for gold and gold-related assets if I ever saw one.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch