Major commodity indices will increase gold weightings for a second year in a row

In our paper Gold: the most effective commodity investment, we highlighted:

• gold is not a typical commodity
• it is the most effective commodity investment and
• it is under-represented in commodity indices.

Interestingly, developments in the performance and liquidity of the broad commodities market have led two major commodities indices -The S&P GSCI and Bloomberg Commodity (BCOM) Index - to adjust their composition, partly addressing the third point. Both indices recently announced that for a second year in a row, their weighting of gold will increase.

Specifically (in 2021):

• Gold will have the largest individual commodity weight increase in the S&P GSCI, and
• Gold will have its highest weight ever in the BCOM, which also takes the precious metals weight of the index to all-time levels.

 

Table 1. Gold weights increased in each of the past two years 

Sources: S&P Global, Bloomberg

 

While we continue to believe some weighting metrics, like liquidity, remain understated, we are encouraged by the acknowledgement from two leading indices of gold’s increasingly important role in the broader commodities complex.

We also believe it is important to underscore why gold is an asset that stands somewhat apart from other commodities, namely:

• Gold has delivered better long-term, risk-adjusted returns than other commodities
• Gold is a more effective diversifier than other commodities
• Gold outperforms commodities in low inflation periods
• Gold has lower volatility
• Gold is a proven store of value
• Gold is highly liquid.