World Gold Council Says Gold Should Be Viewed As a Separate Asset Class

Gold has long been treated as a hedge against inflation in difficult economic times, playing a unique, important and very visible role in global finances. According to a recent report by the World Gold Council, investors should be thinking about gold as being so unique as to place it in a separate asset class from other commodities.

“It is not a single characteristic, but a combination of many factors that combined provides this uniqueness,” said Juan Carlos Artigas, Investment Research Manager at the World Gold Council. “Gold should be viewed as a separate distinct asset class which is a foundation to a well-diversified portfolio; as for those investors who are seeking to achieve true diversification, gold provides benefits that cannot be replicated by investing in a broad basket of commodities alone.”

The World Gold Council says that while gold does fit within the definition of a commodity – an economic good, which is valued and useful and has little or no difference in composition or quality regardless of the place of production – its market dynamics and applications make it distinct from other commodities. Gold has a unique performance profile in terms of returns, volatility and correlation, as well as a much different pattern of supply and demand than other commodities, says Artigas.

The demand of the gold market for example, falls almost exclusively into three categories: jewelry, investment and technological or industrial applications. And perhaps, surprisingly, it’s jewelry that comprises the bulk of global demand, accounting on average for about 59 percent, with investment at around 31 percent and technology and industry making up the remaining 10 percent.

“Many investors are used to hearing in the news about activity in investment in the US and Europe, but what is interesting is that the gold market has a good support from an emerging market economy. Jewelry consumption comes primarily from India, from China, from the Middle East, and those are economies that are expanding and growing,” said Artigas.

This breakdown is much different when you look at silver – to which gold is often compared – for which demand comprises of 25 percent for jewelry, 25 percent for investment and 50 percent for industry and technology.

“With the amount of demand for technology and industry, you can see why in one form or another, silver might be more linked to the business cycle,” said Artigas.

In terms of the supply, another interesting aspect about gold is that mine production comes from every continent in the world and no particular region exceeds more than 20 percent.

“Other commodities that are more concentrated in a particular location are more subject to geopolitical and idiosyncratic risks,” said Artigas.

While gold is often considered by investors as part of a larger set of commodities, its weighting in most commodity indices is small. Within the S&P Goldman Sachs Commodity Index, gold’s weight is around 3 percent while on the Dow Jones-UBS Commodity Index it is typically 7 percent.

“If you consider that an investor has about a 10 percent allocation portfolio to commodities and they are using a benchmark such as the S&P or Dow Jones, that basically means that they would have between 0.3 to 0.7 percent of the overall portfolio to gold,” said Artigas.

World Gold Council studies suggest that relatively small strategic allocations to gold ranging between 2 percent and 10 percent can significantly improve and protect the performance of an investment portfolio.

Artigas explained that the importance of the World Gold Council releasing this report at this particular time lies in gold having a very different reaction to economic and financial variables relative to other commodities in periods of expansion and recession.

“We think it is important for investors to recognize not only in an expansion environment but also in a recession environment that gold tends to be a diversifier,” said Artigas. “It’s very valuable. We show it at different points in time, not only when things are perhaps as rosy as in 2008, which was very easy for investors to see, but also at other times there is still a very important case to be made on the long-term strategic advantages of gold as an asset.”