- The recent outbreak of violence in the Middle East has put the spotlight back on safe haven markets, predominantly crude oil and gold.
- Last week saw WTI crude oil gain 6% from Friday to Friday, though total open interest decreased.
- December COMEX gold added 5.5% while its open interest increased during the week.
On Saturday, October 7 the Palestinian organization Hamas attacked Israel igniting a war that as of this writing shows no end in sight. Setting aside the humanitarian horrors, we have all heard and read of the atrocities and processed them individually, I’m going to focus on how markets reacted and what could lie ahead for the traditional ‘safe haven’ markets. By definition[i], a safe haven “is a type of investment that is expected to retain or increase in value during times of market turbulence. Investors seek out safe haven markets in order to limit their exposure to losses in the event of market downturns”.
There are at least two ways to think of safe haven markets:
- As a hedge in an outside market to protect investments in other vulnerable market sectors.
- An investment opportunity in key markets to enhance investments in other market sectors.
I’ve talked in the past about the Three Kings of Commodities, each acting as a safe haven or investment opportunity for different types of market turbulence around the world.
- Corn: As King of the grain and oilseed sector, this market gains attention when North American weather threatens production, predominantly in the United States. Historically the US has been the top producer, user, and exporter of corn. However, last year saw the US lose the title of top exporter to Brazil with this year expected to be similar.
- Soybeans tend to take center stage when South America has weather issues.
- Gold: Since man first discovered this precious metal it has been used as a key, if not the key market of value. Historically, when global upheavals (political, military, other) arise one of the first markets investors turn to is gold.
- Crude Oil: The last 5 decades or so has seen the rise of crude oil as a safe haven market. The world grew dependent on oil from the Middle East, a region that also happens to be a powder keg of differing religions, politics, and wealth set to explode any day, every day. Time will tell if the move away from petroleum-based economies will defuse the situation, but that’s likely another 50 years away.
The discussion this past week has been whether gold or crude oil is the better safe haven play for the situation in Israel and the Gaza Strip. My Blink reaction early Sunday morning (October 8) was that crude oil would garner the most immediate attention, again based on the importance of the commodity to the world at large. On Thursday, October 5 the spot-month WTI crude[ii] contract (CLX23) closed at $82.31 before rallying to close Friday at $82.79. At Sunday’s open the spot-month contract jumped to $85.25, a gain of 3%, before extending its initial rally to $87.24. This was a one day increase of 5.4%. As the week progressed we saw WTI crude pull back a bit before investors again registered their concern/interest heading into an uncertain weekend, pushing the spot-month issue to a new weekly high of $87.83, up 6% from the previous Friday’s settlement.
While all this indicates WTI futures were indeed acting as a safe haven market this past week, what stands out to me is total open interest decreased from Friday to Friday. The previous week, October 6, the CME reported total open interest in WTI of 1,747,129 contracts. At the close of business Friday, October 13 there were 1,690,285 contracts open. This casts a shadow of doubt over the idea WTI was drawing investor attention.
But what about gold? Again, for trade volume and open interest reasons I’ll focus on COMEX futures. The December issue (GCZ23) closed Thursday, October 5 at $1,831.80 before finishing Friday, October 6 at $1,845.20. Sunday saw the contract open at $1,861.00 before extending its initial rally to a Monday high of $1,877.30. By the time the closing bell rang on Friday the 13th the December issue had hit a high of $1,946.20, up 5.5% for the week.
Yes, WTI crude oil outperformed COMEX gold, slightly, based on price, but there are other factors that hint at which market was used as a safe haven. First, WTI saw a three-day selloff from Monday’s close through Thursday’s settlement[iii]. December gold moved higher throughout the week, the only hiccup a $4.30 lower close Thursday. Second, total open interest in COMEX gold increased last week from 434,085 contracts to. 442,941 contracts at Friday’s close. I know, this opens the debate over the size of the market but let’s not go down that rabbit hole at this time. The bottom line is open interest increased in gold and decreased in WTI crude oil.
What was the better safe haven market for this round of global turmoil? By nearly any measure it looks to be a tossup. Those investors not afraid of more volatility in a quasi-hedge position will likely stick with crude oi while those looking for a safer safe haven market will turn to gold.
As for the new age “safe haven" pretender Bitcoin (BTCUSD), well, it lost almost 4% last week. And that’s all we need to know about that.
[i] From Investopedia.com
[ii] Brent crude is the global market where West Texas Intermediate (WTI) is viewed as the domestic US market. For this discussion I will look at the more heavily traded WTI futures market.
[iii] Bringing to mind a Benjamin Franklin Fish Similarity: Like guests and fish, markets start to stink after three days of moving against the trend.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
