Hedging Geopolitical Risk

Cash is often the first thing investors think of when they’re worried about declines in “risk” assets like stocks.  Treasuries are another, although with prices so high and yields so low, they present risks of their own.  Moreover when inflation – dollar depreciation – is a key concern neither of these provides much protection.

Gold is another popular hedge against systemic risk.  It has recently done well as headlines have not.  But it may not be so widely appreciated that one of the key reasons for its reputation and its usefulness is because of its low correlation with stocks.  Other hard commodities, such as silver, platinum and copper, especially taken in combination, are equally effective defenses against dollar depreciation.  They are simply more highly correlated with stocks than gold, making them less useful in a portfolio that contains a high allocation to stocks.  For a portfolio that has a low allocation to stocks, or one in which stocks are fully balanced with treasuries, the addition of other hard commodities like these can complement a gold allocation to hedge against simultaneous geopolitical and inflationary risks.  We’ve seen this notion in action over the past week.

For more on this issue please see our historical analysis in Copper & Gold and The Impermanent Portfolio.

7 thoughts on “Hedging Geopolitical Risk

  1. jk says:

    other “hard” assets people might wish to explore:

    real estate

    energy – dbe, uso, bno, lng, cop, cvx etc

    fertilizer – cf, ntr, mos [natural gas is a feedstock for nitrogen-based fertilizers. it is around 4.50 in the u.s. and over 30 in europe. thus u.s. fertilizer companies can arbitrage the difference]

    agricultural products- rja

    agricultural equipment, fertilizers, seeds, etc – moo

    broad commodities – dbc and pdbc

    then there are many industrial and mining etf’s and individual companies.

    1. Bill Terrell says:

      Thanks, JK. Indeed those are all good inflation hedges. I focused here on elementary commodities because of the geopolitical angle … they are the same always and everywhere and fixed in supply. They’re not so much “investments” as currency alternatives; stores of value. Although they vary in industrial application, gold, silver, platinum and copper all have a history of use as money. My point here is that with the above caveats, they as a group can be a more diversified alternative to gold alone.

      Broad physical commodities of course are good inflation hedges and the outlook remains bullish (for now) in light of the Synthetic Systems Copper plot. This includes the ETFs you cite. Another one is COMT (disclosure: I have a position). One factor investors should be aware of is which index these (futures based) broad commodity funds aim to track or use as benchmarks … the commodity weightings can vary significantly.

      Generally I prefer to invest in energy and agriculture commodities through land, for instance via equities that own energy reserves, farmland, forest, etc. But they are of course also vulnerable to stock market risk, so funds targeting the commodities themselves can provide an independent means of exposure.

  2. Peter Fife says:

    Test message only…

    A couple of my recent posts have gone down the bitbucket.

    I don’t know why.

    1. Bill Terrell says:

      Hmmm … I don’t know why either. I don’t see any unposted comments from you. Feel free to email with the date if you see this happen again and I can check and confirm whether it’s appeared in the inbox.

  3. Peter Fife says:

    What I posted is not correct. I think I’ve forgotten that you vet the replies, before allowing them to appear; is that correct? And, if so, I assume there is a time lag variance. Sometimes my posts appear straight away and others times not until some time later.

    Also, I have my own time lag variance before I check if my posts are there. So, I think all is good.

    1. Bill Terrell says:

      Yes, for now everything goes into a queue in order to limit spam, so there can be a delay before you see your comment. I’m looking into alternatives so that may change…

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