Gold: The Most Effective Commodity Investment

Excerpted from WGC Report

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.

Reflation is Good for Commodities and Could be Even Better for Gold

The current global economic landscape indicates improving economic conditions, higher inflation and rates expectations, as well as commodity supply shortages which are likely to support commodity performance. Our analysis suggests that gold is still the most effective commodity investment in a portfolio as it continues to stand apart from the commodities complex. It deserves to be seen as a differentiated asset as it has historically benefited from six key characteristics:

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

2021 Key Developments

Gold is a commodity that has always stood apart, but there have been recent market developments that build on its existing differentiators while illustrating the importance of its role in a portfolio.

  • The commodity reflation trade is in full effect, which can negatively impact risk-on assets and could suggest a larger allocation to gold
  • Gold’s weight in commodity indices is increasing, and should continue to increase for a strategic allocation
  • Gold’s volatility has been stable despite the variability in equities, bonds, and alternative assets. 

Volatility has Increased Globally, but Less for Gold

Volatility increased across major assets and commodities in 2020, driven by COVID-19-induced uncertainty, but less so for gold comparatively. A key reason for gold’s relative stability stems from its role as a diversifier in turbulent markets, as well as stronger left-tail correlation between many other commodities and risk-on assets.

Gold Historically Lagged in Commodity-Led Reflation Periods but Outperformed Over the Long Run

Most recent reflationary periods in the U.S. as of June 30, 2021

Period Start Period End REITs Value
Nov-01 Sep-06 39% 8% 0% 5% 20% 22% 24%
Jun-09 Apr-12 25% 16% 21% 7% 5% 7% 27%
Aug-20 Jun-21 28% 30% 19% -1% 29% 45% -10%

Source: The World Gold Council/Bloomberg. BCOM refers to the Bloomberg Commodity Index. The S&P GSCI is a world production-weighted commodity index based on the average of the previous five years.

Implementing an outright or supplemental position to gold reduces risk without diminishing long-term expected returns. In particular, strategic allocations ranging from 2% to 10% can significantly improve and protect the performance of an investment portfolio, while providing the exposure desired by the commodities investment itself.

Read Full WGC Report


Important Disclosure

Past performance is no guarantee of future results. You cannot invest directly in an index. Investments, commentary and statements are that of the author and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this commentary are those of the author and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.

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