In focus: The attractions of gold and oil

Angelos Damaskos, CEO of Sector Investment Managers, explains why gold and oil are good inflation hedges.

It is now generally accepted that the world consumes ever-increasing quantities of commodities.

This is not surprising as the global population has grown from 800 million in 1800 to seven billion today and is on its way to over eight billion.

In addition, the world’s rapidly growing population is demanding a much higher standard of living.

With the collapse of communism 15 years ago and the internet revolution, billions of previously suppressed people began thinking about private enterprise and were incentivised to work hard to enjoy economic wealth.

The internet conveyed information and ideas that could be adapted to the local and regional needs.

The transformation resulted in a great industrial revolution that is still gathering pace and could eclipse that of the US in the early 20th century.

China and India now account for the largest share of growth in consumption of commodities and energy and this growth is likely to continue in the years ahead.

Protecting against inflation

Another trend that has developed in the last two decades is a proliferation of financial instruments and derivative products, stimulated by accommodative fiscal policies and low interest rates in the US, UK and the eurozone.

This has resulted in massive leveraging in these economic areas, built upon un-regulated and misunderstood financial engineering that caused the financial crisis of 2008.

The frantic response to this crisis and printing of money by the respective governments compounded the debt level, large parts of it being assumed by the public sector.

Inflation is now rising and the dollar, euro and sterling, have been losing their purchasing power against those of stronger economies such as Australia, Canada and Norway.

In order to protect against inflation, it is sensible to buy things such as vital commodities as well as other stores of value that are tradeable, such as precious metals. Oil and gold are two commodities which can provide an effective hedge to inflation.

Oil and gold

Demand for oil has been growing while current resources are declining and large new finds have been few and difficult to extract.

Furthermore, geo-political instability in North Africa and the Middle-East, the largest producing regions in the world, threatens supply disruptions.

Gold, on the other hand, has become a safe-haven for public and private investors seeking to diversify away from devaluing dollars, euros and sterling.

Its price has risen over six times in the last eight years and looks set to rise further. Some call this situation a bubble but only history can tell a bubble with the benefit of hindsight.