Focus Boxes and Conclusion

20 January, 2022

Focus 1: Gold – Not your average commodity

Gold is often part of the broad commodity complex: as a component of a commodity index, a holding in an ETF, or a future trading on a commodity exchange. While gold shares some similarities with commodities, there are several important differences:

  • gold is traditionally seen as a safe-haven asset
  • gold is both an investment and a consumer good
  • the supply of gold is balanced, deep and broad
  • gold does not degrade over time, unlike most traditional commodities.

These attributes set gold apart from the commodity complex. And our research suggests that a distinct allocation to gold could enhance the performance of portfolios with passive commodity exposures.4

Two major commodity indices increased their weighting of gold over recent years.5 In 2021, gold had the largest individual commodity weight increase in the S&P GSCI and in 2022, gold will maintain the largest individual weight in the S&P DJCI. It will have its highest weight ever (15%) in the Bloomberg Commodity Index for a second year in a row, a maximum amount for an individual commodity. Yet, our analysis suggests that allocations to gold in these commodity indices remain below their optimal weight.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in US dollars of total return indices for S&P GSCI Agriculture Official Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in US dollars of total return indices for S&P GSCI Agriculture Official Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in pound sterling of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in pound sterling of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in euro of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in euro of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in yen of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in yen of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in US dollars of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in US dollars of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in RMB of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in RMB of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in rupees of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in rupees of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

 

Chart 15: Gold has outperformed most broad-based indices and their individual commodity components

Gold has outperformed most broad-based indices and their individual commodity components

Average annual returns of commodity indices and key individual commodities over the past 20 years*

Gold has outperformed most broad-based indices and their individual commodity components
Average annual returns of commodity indices and key individual commodities over the past 20 years*
*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in Australian dollars of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM. Sources: Bloomberg, World Gold Council

Sources: Bloomberg, World Gold Council; Disclaimer

*Annualised average returns from 31 December 2001 to 31 December 2021. Computations in Australian dollars of total return indices for S&P GSCI Agriculture Close Index, Bloomberg Commodity Index, S&P GSCI Copper Official Close Index, S&P GSCI Grains Official Close Index, LBMA Silver Price, S&P GSCI Livestock, S&P GSCI Platinum Index, S&P GSCI Total Return CME, S&P Oil Index, LBMA Gold Price PM.

Conclusion

Perceptions of gold have changed substantially over the past two decades, reflecting increased wealth in the East and a growing worldwide appreciation of gold’s role within an institutional investment portfolio. 

Gold’s unique attributes as a scarce, highly liquid, and un-correlated asset demonstrate that it can act as a diversifier over the long term. Gold’s position as an investment and a luxury good has allowed it to deliver average returns of 11% over the past 50 years, comparable to equities and more than bonds and commodities.1,2 

Gold’s traditional role as a safe-haven asset means it comes into its own during times of high risk. But gold’s dual appeal as an investment and a consumer good means it can generate positive returns in good times too. This dynamic is likely to continue, reflecting ongoing political and economic uncertainty, persistently low interest rates and economic concerns surrounding equity and bond markets. 

Our analysis suggests that adding between 4% and 15% of gold to average hypothetical portfolios depending on the on the composition and the region can make a tangible improvement to performance and boost risk-adjusted returns on a sustainable, long-term basis.3

Focus 2: Gold as a responsible and sustainable investment

We believe that gold should be viewed as an asset that is responsibly sourced, delivered from a supply chain that adheres to high environmental, social and governance (ESG) standards. Gold also has a potential role to play in reducing investor exposure to climate-related risks.

While gold mining is, by definition, an extractive industry, responsible gold miners mitigate environmental and social risks and contribute heavily to the communities and host countries in which they operate. They do so through the payment of wages and taxes, support of local economic development, improvements to infrastructure, and access to healthcare and schooling, and much more. The majority of this expenditure remains in the local economies of host nations and communities, as documented recently in our measurement of the social and economic contribution of gold mining. The industry is also committed to contributing to the advancement of the UN Sustainable Development Goals

Our members, as industry leaders, are committed to the Responsible Gold Mining Principles (RGMPs), launched by the World Gold Council in 2019. These principles cover all material aspects of ESG related to gold mining and set clear expectations as to what constitutes responsible gold mining. Conformance with these Principles needs to be publicly disclosed and assured by independent experts. 

In addition, we believe gold miners can contribute to the decarbonisation of the global economy and gold, as an asset, can play an important role in mitigating climate-related risks within an investment portfolio. 

On a global level, gold’s overall carbon footprint is relatively small but not insignificant (under 0.4% of global emissions). However, the opportunity for the gold supply chain to reduce its total greenhouse gas emissions is well within reach. Research suggests that, unlike many other commodities and sectors, this opportunity is clear and concentrated. Most emissions associated with gold are created during its production, particularly from mining’s generation and consumption of electricity, and significant progress is already being made to reduce these power emissions. 

Gold’s lack of downstream emissions has important implications for gold investors, as gold holdings can reduce the carbon intensity of the portfolio value. And the positive outlook for future decarbonisation of the gold value chain has potential benefits for the projected carbon profile, ‘implied temperature’ and climate target alignment of portfolio holdings.

Our analysis suggests that gold has the potential to perform better than many mainstream asset classes under various long-term climate scenarios, particularly if climate impacts create or exacerbate market volatility or we experience a disruptive transition to a net zero carbon economy. Furthermore, gold’s value is less likely to be negatively impacted by a rising carbon price, also offering investors a degree of insulation from the likely policy responses needed to accelerate the move to a decarbonised economy.

Footnotes

  1. Average annualised returns in US dollars from January 1971 to December 2021.

  2. See Chart 22.

  3. See Chart 13.

  4. For more information on the gold weight increases see: Major commodity indices will increase gold weightings for a second year in a row

Important disclaimers and disclosures [+]Important disclaimers and disclosures [-]