From a macro picture, we recently warned about a potential correction in gold based on an upward trend in real rates/USD, gold's historical nemesis. Indeed, gold has declined 2.7% since then (falling as much as 5.0% before rallying post the Hamas attack). However, our model shows that gold is still outperforming its fundamentals. In particular, historical episodes of risk flares in the Middle East where the USD rose, generally saw the yellow metal struggling, especially if real rates do not cooperate meaningfully. Given how tight the labor market is, this appears to be unlikely in the near term.
Finally, we look at the hypothetical payout ratio of 1m 25-delta calls on a number of benchmarks that theoretically stands to benefit from rising tensions in the Middle East (using current prices), including oil, the USD, gold, Treasuries, and Energy-related equities (both in the US and Europe). At current costs, USO calls stand to offer the best 'bang-for-the-buck'. Buying USO 27-Oct-23 83 calls (ref. 77.13, 23-delta) costs indicatively 1.2%.
- Barclays Strategy
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