Safe haven assets such as gold have traditionally performed well in uncertain times such as wars and economic turmoil. Gaurav Kashyap, head of futures at EGM Futures DMCC, a subsidiary of the Equiti Group, explains that people often decide to mitigate the risk of losses during times of unpredictability in the commodity market. âInvestors are looking to diversify their risk, especially during uncertain markets. Traders look for investments that save value for money. The reason is that in times of uncertainty, the most expected action of central banks is to have an easing of monetary policy, that is to say a depreciation of the value of its currencies and which will be in favor of assets that will be treated as safe havens and value savers. like gold, âhe says.
Kashyap also says gold is particularly attractive in times of low inflation. âAnother positive factor for gold prices are inflation rates and interest rate levels. What you could buy with an ounce a long time ago is still worth an ounce today. Both rates play a big role in the price of gold during the economic downturn. Central banks tend to lower interest rates, which will depreciate the value of its currency, making gold more attractive. “
Kashyap believes that the increasing number of people vaccinated has had a positive impact on the prices of raw materials, especially oil. âSince the vaccination rate has increased in many countries around the world, the prices of basic commodities have improved dramatically, especially the price of oil. Covid vaccines have been a game-changer for oil as they have accelerated the recovery in demand and pushed up oil prices. This allowed travel, transportation and other business activities to return to normal as consumer spending increased and the business cycle improved. The vaccine will improve the food, drink and tourism sectors around the world as lockdowns gradually ease and more people are vaccinated. “
He says technology is also an area that has seen growth, especially as more and more people are working from home. âAnother trend is that technology sectors will continue to dominate the market as the best investment opportunities due to the new change of business modules regarding work from home policy,â he said. âA Microsoft survey found that 74% of companies who plan to permanently move some of their employees to remote work. “
An alternative to the dollar
Stavros Tousios, head of investment research, Orbex, says commodities such as gold are often a popular alternative to currencies in times of uncertainty. âIn general, commodities are a good place to avoid any form of uncertainty because they offer an alternative option to the dollar.
âIn uncertain times, the demand for commodities like gold depends on two factors; supply and inflation expectations.
âThe covid-19 outbreak last February raised concerns about supply chains and companies with enough working capital to find alternative suppliers. Counterintuitively, we saw a first reaction from safe haven assets like dollars and silver, and gold in particular. Then, in March, markets collapsed due to tight liquidity. “
Tousios says inflation has also had an impact on the commodities market. âAll of the stimulus spending raised concerns about potential inflation, which would naturally weigh on the strength of the dollar and provide the foundation for a strong gold take-off. And it did. Even so, a Ironically, we are coming to the end of the covid-19 recession for some time now with the rollout of vaccines, âhe says.
According to Tousios, the commodities market is linked to the health of economies and investors should be aware of market fluctuations. Historically, commodities have been largely affected by global economic activity. As economies reopen, a sudden need for raw materials and petroleum products could affect the prices of gold, silver and oil. However, when the economy begins to normalize again, the appetite for commodities may wane and investors will want to start looking for more risk in speculative oil. “
He says monetary policies such as the US stimulus package could also cause fluctuations in commodity prices. âWith the latest stimulus packages from the United States, there is currently growing concern about inflation, which means the dollar could weaken and gold prices could strengthen. With monetary policy and the usual business cycle playing an important role, investors need to keep a close eye on all of these factors to demystify the markets. Only then can they plan their trades in advance while keeping emotions out of the equation.
A diversified market
Kaia Parv, Head of Investment Research, FXPRIMUS, says the commodities market is extremely diverse. âThe products as a group are extremely diverse, with each subgroup having different characteristics. In general, demand and supply always determine prices, but additional variables, such as the business cycle, politics, climate and social factors must also be taken into account.
âHowever, commodities as a group has become highly financialized, which means commodity derivatives have grown tremendously in size and are now the second most traded derivative category. This had an impact on correlations with other asset classes as well as on the price elasticity of commodities.
She says investors should study the market and make sure they are using reliable and secure platforms before buying commodities. âInvestors interested in commodities markets should find instruments, for example ETFs, which have high liquidity and can be traded easily and securely. Independent research is a given. However, one should also think about risk management by implementing stop-loss orders to minimize losses, if the price goes in the opposite direction. I would also suggest that new investors avoid leverage, at least initially.