Why Jefferies’ Chris Wood sees gold as the second-best hedge amid Iran war and fiscal risks

Gold is the second-best hedge for investors amid rising fiscal and geopolitical risks, according to Jefferies global head of equity strategy Christopher Wood, who said oil and energy stocks remain the preferred hedge as the economic and geopolitical pressure surrounding Iran continues to disrupt energy markets.

Wood said the latest strategy appears to be based on hopes that economic pressure will force Tehran back to the negotiating table, but said he would not bet on such an outcome. Tehran, he said, has every incentive to maintain the pressure until the US mid-term elections, which are now 11 weeks away.

The Strait of Hormuz consequently remains essentially closed to most ships, while the price gap between crude oil and refined products such as diesel has continued to widen. Wood pointed to the Diesel Crack Spread, which measures the price difference between diesel futures and WTI crude oil futures, rising above $100 a barrel for the first time ever on Monday.


Also read: Why Jefferies’ Chris Wood, billionaire John Paulson say gold’s long term bull market is just getting started

"This is why investors need to own oil and energy stocks as the best hedge, with gold second best," Wood said.

Chris Wood’s renewed call to buy gold

This is Wood’s second bullish take on gold in quick succession. Last month, he said investors should once again begin accumulating gold and gold mining stocks after an extended pause.

He draws a parallel with the dot-com bust, arguing that when the Nasdaq-led technology sector drove the market lower, the bear market had by late 2,000 spread beyond technology to other sectors as it became clear that the unwinding of the dot-com boom would affect the broader economy.

Wood believes a similar scenario could unfold if the AI capex boom implodes, which he says would happen if credit issues come to the fore. This comes despite the broadening of the US equity market since the AI capex boom and the related increase in the wealth effect in the US stock market, which have been among the main drivers of US economic growth over the past three years, along with easy fiscal policy.

Any such collapse in capex spending would trigger an abrupt shift in US monetary policy expectations from tightening towards easing. For these reasons, Wood believes the time has come for investors to start accumulating gold and gold mining stocks again after an extended pause to refresh.

Gold outlook

The World Gold Council says at current levels, gold prices are broadly aligned with a global backdrop of moderate growth, cooling but still elevated inflation, and expectations of further, but limited, central bank tightening. Under these conditions, gold is likely to remain relatively rangebound, within a range of ±5%.

However, the stage could be set for a possible breakout. On the upside, clear catalysts such as a worsening economy, a renewed geopolitical shock, a shift towards lower interest-rate expectations or a wave of dip buying could reignite gold's momentum and push prices back towards US$4,500/oz or above.

If the signals are strong, gold could move even higher.

Read more: Gold’s sharp correction: What lies ahead for prices?

On the other hand, resilient economic growth, rising yields and calmer markets could put further pressure on gold. Even so, a decline of more than 10% from current levels could be limited by bargain-hunting demand.

Meanwhile, continued central bank demand and policy shifts in key markets such as India remain additional wildcards that could subtly influence gold's trajectory in the second half of the year.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)