One of the more popular debates among economists revolves around the question: what’s the point of gold?
Some think that it doesn’t serve any purpose, and therefore doesn’t have any intrinsic value.
Others claim that hoarding gold is a legitimate way to safely store wealth, in preparation for economic troubles.
Investors in aggregate tend to lean towards the latter sentiment. In times of market turmoil, they generally dive head-first into the shiny metal.
Still, while gold tends to go up in times of economic stress, it doesn’t do as well in risk-on periods. And the problem here for investors is that it’s basically impossible to predict what will happen next in the markets.
As such, a Citi research team led by Jonathan Stubbs argued that, overall, black gold — aka oil — is probably a better bet than gold.
“Many investors see gold as the ultimate hedge. We see a strong case for owning ‘black gold’ over gold for those truly looking for a two-way, rather than one-way, hedge against real world risks,” the team recently wrote in a note to clients.
As they explained in greater detail:
We believe that there is a stronger case for black gold (oil, or more specifically oil equity within the remit of a simple equity strategist) as an attractive investment in periods of both risk off and risk on, unless we face a return of high-level global systemic risk, in which case gold will likely win out. Oil also provides a degree of protection against inflation risk, which may be helpful at some point in the future.
Looking at how oil and gold have traded over the last 25+ years would suggest that this is a reasonable time to be making the case for black gold over gold if our thinking is heading in the right direction. Oil equity also offers an attractive coupon, as discussed, and is very liquid.
Plus, although the Citi team doesn’t explicitly discuss this, it’s worth noting that the real world basically runs on oil and there are (so far) few short-term substitutes for the commodity. On the flip side, gold’s primary uses are in the form of jewellery, coils, and dentistry — and in all these cases it can theoretically be substituted for something else.