FX Invest: Macroeconomic uncertainty boosts demand for gold and oil exposure

Continued uncertainty about inflation and deepening concerns over sovereign default risks in Europe are making the commodities increasingly attractive as hedging tools

Worries about the scale of sovereign debt – and the threat of a Greek government debt default in particular – are leading investors to accumulate positions in precious metals-based exchange-traded commodities (ETC), according to an ETF Securities report. ETC inflows have recently risen by $164 million, led by physically backed gold products.

"Rising market volatility, global economic uncertainty and geopolitical unrest have increased interest in gold as both a short- and long-term investment," says David Gardner, managing director and head of sales for Europe, the Middle East and Africa at iShares in London. "There are multiple uses of gold, the most widely quoted being for portfolio diversification, inflation hedging and as a potential 'safe haven' during periods of political or economic uncertainty."

Some investors do regard gold as a store of value and an alternative currency in times of financial distress, says Robert Farago, head of asset allocation at Schroders Private Banking. But the scarcity factor of oil also makes the private bank bullish on that.

"Our favourite commodity play is definitely oil," says Farago. "If you look back to the 1970s, all types of commodity – energy, metals, and soft commodities – rose together, but the latter part of the rally was led by oil and gold. We think there is a reasonable chance this could happen again. There is not enough oil to meet future demand and ongoing tensions in the Middle East are placing further pressure on production, increasing the risk of further price spikes," he says.

In Asia, demand for exposure to precious metals, oil and soft commodities to hedge against inflationary pressures also remains strong.

One of HSBC's popular structured product offerings includes a principal-protected, one-year Australian dollar floored barrier note linked to gold with a 5% coupon.

"The reason investors are attracted to commodities is because of inflation protection," says Ken Sue, managing director and head of wealth management sales Asia-Pacific at HSBC in Hong Kong. "We've seen a reasonable amount of interest in precious metals and some enquiries for soft commodities and base metals linked to concerns around inflation."

BNP Paribas' Twin Win autocallable product is also proving popular among Asian investors seeking exposure to oil. If the underlying stays within a set range investors receive a coupon, the value of which falls if the underlying falls outside the range.

"People generally seek exposure to oil through this product, but we've seen requests for trades on other commodities, such as sugar, copper and silver," says Renaud Meary, head of structured equity, Asia-Pacific for BNP Paribas in Hong Kong. "The product also exists on multiple underlyings, the most recurring examples being oil and gold."