Hi Traders,
As the market continues to show resilience, it's important not to overlook the escalating geopolitical risks that have been building over the last few days. Recently, President Biden approved Ukraine's use of Western-made long-range missiles to strike deep inside Russia, marking a significant shift from his previous reluctance. This decision is influenced by the introduction of thousands of North Korean troops onto the battlefield in support of Russia, as indicated by Deputy National Security Adviser Jon Finer.
Ukraine wasted no time in utilizing these missiles, launching attacks that the Russian Defense Ministry claims were mainly intercepted. However, fragments of one missile reportedly hit a military target inside Russia without causing casualties.
In response, Russian Foreign Minister Sergei Lavrov stated that this development signals a desire for escalation from the West, emphasizing that such high-tech missiles couldn't be used without American involvement.
In retaliation, Russia has amended its nuclear doctrine, expanding the range of threats that could provoke a nuclear response to include the very long-range missiles Ukraine has deployed. This move raises concerns about whether President Putin might elevate the conflict using some form of nuclear weapon.
While many analysts believe these nuclear threats are bluster intended to deter NATO involvement, it's undeniable that the situation has intensified.
Bloomberg suggests that focusing solely on whether Putin will use nuclear weapons misses a broader strategic point. Russia, North Korea, and to a lesser extent China, understand that they would likely lose a full-blown conventional war against the United States.
As a result, they're developing strategies to compensate for this weakness by leveraging nuclear capabilities, not necessarily to attack the U.S. directly, but to deter it from intervening or to end conflicts on their terms using tactical nuclear weapons.
This high-stakes geopolitical environment is not conducive to a "peace dividend" that would benefit the stock market. Instead, it serves as a reminder of the importance of assets like gold and oil in a well-balanced investment portfolio. Both have seen gains amid the rising tensions, with gold up roughly 2% since yesterday and oil adding more than 3%.
It's easy for investors to get caught up in daily market fluctuations and second-guess the value of holding these assets, especially when considering factors like potential overextension, dollar strength, or government policies that could pose headwinds. However, these concerns can distract from the bigger picture for longer-term investors holding high-quality oil stocks and gold.
Historical data underscores the value of these assets. Over the past 25 years, the SPDR Energy Select Sector ETF (XLE) has significantly outperformed the S&P 500 when dividends are reinvested, nearly doubling its returns.
Even without the benefit of dividends, gold has more than 2.5 times the returns of the S&P 500 during the same period. This performance highlights how gold and energy stocks can be effective hedges against market volatility and geopolitical uncertainties.
In light of current events, investors must consider how geopolitical risks impact their portfolios. Gold and oil remain vital components for hedging against market volatility. Consider adding or increasing exposure to gold through physical holdings, ETFs, or mining stocks.
These tend to perform well during periods of heightened geopolitical uncertainty. Maintaining a balanced approach will be vital in securing long-term gains as we face these uncertain times. It is up to you to make the right moves.
- The Team at Altos Trading