Gold performs like nothing else in the commodity complex – WGC's De Pessemier

Gold ’s supply-and-demand dynamics, diversification benefits and resilience across market environments are unique among all commodities, and the yellow metal should be treated as a distinct portfolio allocation, according to Jeremy De Pessemier, asset allocation strategist at The World Gold Council (WGC). Investors have long recognised the benefits of investing in commodities. Over time, they have been shown to improve portfolio diversification, offering inflation protection and an element of smoothing across economic cycles. Most investors access this asset class via commodity indices, which invariably include gold. But he argues that gold’s weighting in broad commodity indices fails to do justice to the yellow metal’s importance as a strategic component of investor portfolios. Index methodologies typically rely on futures-market liquidity and/or production-based measures, neither of which fully captures the structure of the gold market. Gold's liquidity extends beyond futures markets through deep OTC and ETF trading, while its available supply extends beyond annual mine production through a large above-ground stock that can be recycled, resold and reallocated. As a result, broad commodity indices may assign gold a modest weight even though its market depth, available supply and strategic portfolio role are greater than those weights suggest. And even though gold’s increased value has caused these allocations to rise higher, the World Gold Council doesn’t believe they provide enough exposure to gold. Moreover, exposure to gold through a broad commodity index does not serve strategic investors optimally. Rather, it results in roll costs, which – unlike most other commodities – are avoidable with physical allocation. De Pessemier describes gold as “a multi-faceted asset that enjoys diverse supply and demand dynamics.” Gold is, on the one hand, often used as an investment to protect and enhance wealth over the long term, but on the other hand it is also a consumer good, via jewellery and technology demand. This demand structure sets gold apart and makes it less sensitive to the business cycle. Indeed, during periods of economic uncertainty it is the counter-cyclical investment demand that drives up the gold price. During periods of economic expansion pro-cyclical consumer demand supports performance. De Pessemier then reviews the key investment characteristics that set gold apart from other commodities. First, gold offers better overall returns than other commodities. Investors have long considered gold a beneficial asset during periods of uncertainty. Yet, historically, gold has generated long-term positive returns in both good and bad economic times. And when compared to commodities, gold has outperformed not only broad-based indices but also most sub-indices over the past 3, 5, 10 and 20 years. Gold’s diverse sources of demand also make it less volatile than other commodities. As such, gold can enhance portfolio stability and improve risk-adjusted returns. The second key differentiator is gold’s effectiveness as a diversifier. Gold has important diversification properties that come into their own during periods of systemic risk. In fact, gold has little to no correlation with many other assets, including commodities, underscoring that its role as a diversifier is distinct and cannot be replicated through broad commodity exposure alone. One crucial aspect of this property is that this correlation is dynamic, and it benefits investors as it changes across economic cycles. Like other commodities, gold is positively correlated to stocks during periods of economic growth when equity markets tend to rise. But importantly, gold is typically negatively correlated with stocks during risk-off periods, protecting...