Gold: the most effective commodity!
Recently the World Gold Council (WGC) -the market development organisation for the gold industry, published the report, ‘Gold: the most effective commodity investment-Why it is under-represented in commodity indices and the potential impact on your portfolio.
According to the report, gold allocations of 2%-10% in a typical pension portfolio have provided better risk-adjusted returns than those with broad-based commodity allocations. Investors have long recognised the benefits of investing in commodities.
Over time, they have been shown to improve portfolio risk-adjusted returns, offering diversification, inflation protection and an element of smoothing across economic cycles. Most investors access this asset class via commodity indices, which invariably include gold.
But gold’s weighting within these indices undervalues its importance as a strategic portfolio asset. Gold is, of course, a raw material used in the production of manufactured goods – the very definition of a commodity. But gold is much more than that.
As both an investment and a consumer good, it is a multi-faceted asset that enjoys diverse supply and demand dynamics that play an important role in gold’s performance. Standing apart from the commodities complex, gold deserves to be seen as a differentiated asset as it has historically benefited from six key characteristics.
The report focuses, 1: It has delivered better long-term, risk-adjusted returns than other commodities, 2: It is a more effective diversifier than other commodities, 3: It outperforms commodities in low inflation periods, 4: It has lower volatility, 5: It is a proven store of value, 6: It is highly liquid.
Ultimately, commodities can be a relevant tactical asset, but a strategic gold allocation can supplement or replace a broad-based commodities investment alone, as it may offer more widespread benefits.
