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Gold Ranks as the Most Effective Commodity Investment

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The current economic environment is generally supportive of commodities. Higher inflation rates, improving economic conditions and commodity supply shortages all favor this sector.  As a result, investors are increasing allocations to commodities. And according to a report published by the World Gold Council,  gold is positioned as the most effective commodity investment in a portfolio.

Commodities can be tactically relevant investments, but a strategic gold allocation on its own can supplement or replace a broad-based commodities investment.”

According to the World Gold Council, gold is the most effective commodity investment and historically stands out from the broader commodity complex. It cites six key characteristics.

  • It has delivered superior absolute and risk-adjusted returns to other commodities over multiple time horizons
  • It is a more effective diversifier than other commodities
  • It outperforms commodities in low inflation periods
  • It has lower volatility
  • It is a proven store of value
  • It is highly liquid.

The inflationary period we’re currently in is key to the World Gold Council’s bullishness. Analysts examined the performance of various assets during the last two periods of reflation – CPI trough to peak – and compare this to the current environment.

The results confirm the idea that assets like Real Estate Investment Trusts (REITs) and Treasury Inflation-Protected Securities (TIPS) were solid performers, with commodities and gold performing well. Additionally, it confirms gold’s meaningful outperformance over equities and bonds.”

Currently, gold is down 10% compared to other commodities, which are up substantially. But this is not unusual in commodity-led reflationary periods.

Historically, gold lags initially, but catches up to most major commodity groups by the second and third years of a reflationary period.”

Even with the recent underperformance, gold outperformed nearly every major commodity last year, also outpacing the negative returns of both major commodity indices.

According to the WGC, gold has performed broadly in line with the S&P 500 over the long term, delivering average annual returns of 10.8% since the elimination of the gold standard in 1971 and a compound annual return of 7.9%. When compared to commodities, gold has outperformed not only broad-based indices but sub-indices and most individual commodities too. Nearly all sub-indices have fallen over the past five years. But gold has risen during that time. Gold has also outperformed major commodity sub-indices over the past 10 and 20 years and outperformed most individual commodities, many of which have delivered negative returns in recent decades.

Conventional wisdom tells us that commodities serve as good inflation hedges. Looking at commodity performance more broadly during inflationary periods confirms this. Commodities, in general, have performed well.

But gold has performed better.

And in periods of low inflation, commodities delivered negative nominal returns, while gold posted positive returns, reflecting increased demand when economic conditions are robust.

The World Gold Council suggests gold is an under-allocated asset.

Commodity exposure is generally limited to less than 10% of an investment portfolio, and in many cases, this is much lower. Gold usually accounts for less than 10% of that amount – in other words, most portfolios will have less than 1% exposure to gold. While commodity exposure does provide diversification benefits from a lower volatility perspective, our analysis suggests that adding a 2%–10% portfolio allocation to commodities decreased risk-adjusted returns over the past 20 years. However, gold can do much more. Looking back over the past two decades, replacing or supplementing a commodities allocation with gold provided two key benefits: it increased absolute returns and reduced portfolio volatility when compared to a portfolio with no commodity exposure or with only broad-based commodity exposure.”

In summation, gold is much different from other commodities. This difference is underlined by gold’s robust performance profile in terms of returns, volatility, and correlation. Taken together, these characteristics produce a more diversified portfolio than one with a simple, broad-based commodities exposure.

Looking at other commodities, some can be considered luxury goods, some have technological applications, and some are basic, everyday products. Some are used to hedge against inflation, some protect against currency devaluation, and all provide a degree of diversification in an investment portfolio. However, only gold performs all these functions.”

You can download the full World Gold Council report HERE.

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