In addition to being a precious metal and an investment asset, gold also falls into the category of ‘commodities’ or raw materials. It is often said that, compared to the others, it is the best for all the advantages it has for the investment portfolio. In this post we are going to compare what the precious metal can offer compared to the rest of the ‘commodities’.
A ‘commodity’ is defined as an economic good that has a value and is useful , and that does not present differences in terms of its composition or quality depending on the place where it was produced.
There are very diverse ‘commodities’, from precious metals (gold, silver, platinum and palladium) to base metals (iron, copper, aluminum, tin…), through fuels (oil, natural gas), agricultural products (cereals , sugar) and even cattle.
Gold as a ‘Commodity’
According to the previous definition, gold falls into the category of ‘commodities’. However, due to its market dynamics and the great diversity of its applications (investment, jewelry, electronics, medicine…) it is very different from the rest.
As pointed out by the World Gold Council , in their recent report ‘Gold: the most effective investment commodity’:
“This difference is due to the enormous relevance of the revaluation profile of gold in terms of returns, volatility and correlation. All these characteristics together allow the diversification of the investment portfolio to be much greater than with intensive exposure to one of these commodities” .
Some of these are considered as luxury goods; others have applications in the field of technology; others act as protection against inflation or currency devaluation; and, in general, all allow a greater or lesser degree of diversification in an investment portfolio. However, gold is the only ‘commodity’ that performs all these functions simultaneously.
The arrival of the pandemic in Europe, starting in March 2020, significantly increased the volatility of most assets and ‘commodities’. Of all of them, gold is the least affected by this volatility.
The reason for this relative stability of the precious metal derives from its role as an element of diversification in turbulent environments, in addition to its low correlation with other ‘commodities’ and investment assets.
This allows gold to hold its own at times when other commodity indices plummet. A quality that is highly appreciated by investors.
Returns and diversification
Another difference between gold and other commodities is the precious metal’s ability to consistently deliver returns over the long term.
As the World Gold Council report underscores , the gold metal’s long-term performance is comparable to that of the S&P 500 stock index , with an annual rate of 10.8% since the elimination of the gold standard in 1971 , which is equivalent to a compound annual return of 7.9% .
Compared to the rest of the ‘commodities’, gold has outperformed most of them during the past 5, 10 and 20 years, as can be seen in the following graph.
In addition to this superior performance, gold also offers an invaluable investment portfolio diversification service, which is especially effective in times of systemic risk.
This is because the metal hardly correlates with other assets, including commodities, during times of stress, while it maintains a positive correlation with capital markets during times of economic growth, when stocks rise.
This capacity highlights the double condition of gold, as a consumer good and an investment asset.
Thus, when economic conditions are favorable, consumer spending increases in sectors such as jewelry or technology, which favors gold.
In contrast, in times of systemic risk, investors look for high-quality, liquid assets that are capable of preserving capital and minimizing losses. Once again, gold benefits from increasing investment demand and, therefore, its price.
Finally, gold also benefits from its comparison with the rest of the ‘commodities’ in relation to its storage costs.
Most investors access the commodity markets through futures contracts, which are based on the expected price of the commodity at a specific time in the future, plus transportation and storage costs, and interest.
Therefore, investors are exposed to a new source of volatility: the so-called ‘futures curve’ .
However, this curve has less impact in the case of gold, since the costs of storing gold are much lower compared to those of other metals, or those of fuels such as oil or natural gas.
It must be taken into account that the enormous density of gold means that a ton of this metal occupies a much smaller volume than that of other metals such as iron, copper or silver.
For all these reasons, gold, although it shares characteristics with the rest of the ‘commodities’, outperforms them due to its intrinsic characteristics and the value it has due to its multiple applications.