While many investors classify gold as a commodity, gold stands out from other commodities and alternatives, potentially offering more efficient diversification — a benefit that may support treating gold as a unique asset class, with a distinct and independent allocation of its own.
As portfolio construction evolves beyond the traditional “balanced” 60/40 stock and bond portfolio, investors are increasingly looking to add exposures with less traditional assets that can potentially add both diversification and uncorrelated returns. Based on gold’s historically low correlation with many traditional asset classes, an active allocation to gold may help to potentially improve strategic allocations and portfolio construction strategies for a wide range of portfolio risk profiles across a variety of full market cycles.
A commonly cited motivation to invest in broad commodities is to combat inflation, with commodities historically providing unique diversification and, generally speaking, positive average returns across various inflation environments. But not all commodities have performed similarly across all business cycles, and the extent of a commodity’s ability to offset inflation is more nuanced and dependent on the current or projected inflation regime.
Turning to today’s market, investors are contending with a high level of macro risk, low interest rates and high stock valuations, and inflation concerns are on the rise. Based on historical data, this backdrop may be positive for gold, with gold’s historical returns during periods of high inflation outperforming a basket of broad commodities. 1
Moreover, as the chart below illustrates, certain commodities, such as oil, copper, and even silver, have historically been more cyclical than gold and have tended to have a higher correlation to market and economic cycles because their demand depends more on pro-cyclical consumption, meaning they may capture more of the upside movements in global equities, but they may also experience more
of the downside when equities fall.
Source: Bloomberg, State Street Global Advisors. Data from January 31, 1990 to September 30, 2021. BCOM = Bloomberg Commodity Total Return Index. GSCI = S&P GSCI Total Return Index. Past performance is not a guarantee of future results.
Understanding How to Compare Gold With Other Asset Classes
In conversations with investors, we are frequently asked how to compare gold with other commodities, liquid alternatives, and currencies. We often hear investors classifying gold as a commodity alongside other diversifying asset classes, such as oil, real estate, currencies, private equity and even a broad commodity index to gain exposure to gold. But gold frequently stands out from the pack of other commodities and alternatives, potentially offering more efficient diversification than many other sources — a benefit that may support treating gold as a unique asset class, with a distinct and independent allocation of its own.
Investors commonly access the commodity asset class by using broad commodity indices and passive strategies. This approach, however, should not be viewed as a substitute for an independent allocation to gold. In fact, based on three of the more prominent broad commodity indices, the gold allocation within a broad commodity index can range from 4% to 14%.2 This potentially leaves a portfolio underexposed to gold and some of its beneficial investment characteristics. Practically speaking, gaining gold exposure via a broad commodity index may offer investors access to some of gold’s diversifying and inflation-fighting benefits, but the relatively low exposure to gold may leave some potential benefits untapped.
When we compare gold with a major broad commodity index, we see that historically, gold has outperformed with less downside.
Source: Bloomberg Finance, L.P., State Street Global Advisors. Data from 04/30/1991 to 09/30/2021. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Past performance is not a guarantee of future results. Gold is measured by LBMA Gold Price PM (USD/oz).
When discussing gold’s diversification benefits, the conversation often turns to other “liquid alternatives” that are frequently leveraged for their daily liquidity and low correlations to stocks and bonds. But broadly speaking, gold has historically maintained a lower correlation over time and has provided a more efficient source of diversification than many of those other assets, including REITs, liquid hedge fund strategies, and private equity proxies.
Since 2008, gold’s correlation to equities has trended lower, while other alternative asset classes have experienced a rise in their correlation to equities, potentially reducing the diversification benefits they provide to investors’ portfolios.
Source: Bloomberg Finance, L.P., State Street Global Advisors. Data from 12/31/1993 to 09/30/2021. Gold = gold spot price. Commodities = S&P GSCI Total Return Index. Hedge Funds = Hedge Fund Research HFRI FOF Diversified Index. REITs = FTSE NAREIT All Equity REITS Total Return Index. Private Equity = LPX50 Listed Private Equity Index Total Return. Past performance is not a guarantee of future results.
Currencies are another way that investors can manage volatility and inflation. With the evolution of technology, investors now have digital currencies, such as Bitcoin, to consider as an alternative for gold. But in our opinion, Bitcoin is not gold. In fact, Bitcoin’s extremely limited track record, exceptional volatility and speculative nature have yet to demonstrate that it can effectively transfer and preserve wealth like gold has the potential to do. And most central banks and other institutions still do not accept cryptocurrencies — such as Bitcoin — as a medium of exchange, further diminishing some of Bitcoin’s benefits relative to gold.
On a diversification and risk-adjusted return basis — especially during market downturns — Bitcoin historically is not comparable to gold, as seen in the following chart:
Source: Bloomberg Finance L.P. & State Street Global Advisors, date as of September 30, 2021. Gold is measured by LBMA Gold Price PM (USD/oz). Past performance is not a reliable indicator of future performance.
While innovation in the market is inevitable and welcomed, our stance is that both history and data have provided testament to gold’s historical store of value and virtues of diversification and liquidity — especially when compared with commodities, other alternative asset classes and cryptocurrencies, such as Bitcoin.
Based on today’s changeable markets and risks, gold’s role in a modern-day portfolio may be extending its reach, redefining its uses and benefits among the list of known portfolio diversifiers and traditional fixed income assets that investors have historically relied on to navigate risks and grow portfolio values.
As the investment landscape evolves, our SPDR gold strategy team continues to monitor market trends and investor demand. You can read their latest commentary here.
1Bloomberg, State Street Global Advisors. Data from 1/1/1970 – 09/01/21. High inflation is represented by the US Consumer Price Index (CPI) Index being equal to or above its long-term median of 5%. Gold’s and a basket of broad commodities’ average annual returns were 14.92% and 2.99%, respectively, during high-inflation environments. Gold Price is represented by LBMA Gold Price PM Index. Commodity prices are represented by S&P GSCI Price Index. Past performance is not a guarantee of future results.
2Bloomberg Finance, L.P.& State Street Global Advisors. Note: Standard & Poor’s GSCI Index, Rogers International Commodity Index®, and Bloomberg Commodity Index represent broad commodity indices and Index weights represent target allocations as of September 30, 2021 per the relevant index provider. Past performance is not a guarantee of future results.
Bloomberg Commodity Index A broadly diversified commodity price index distributed by Bloomberg Indexes that tracks 22 commodity futures and seven sectors. No one commodity can compose less than 2 percent or more than 15 percent of the index, and no sector can represent more than 33 percent of the index.
Bitcoin A peer-to-peer digital currency created in 2009 that offers the promise of lower transaction fees than those of traditional online payment mechanisms. Unlike government-issued currencies, Bitcoin is run and “regulated” by its own users using an infrastructure called “blockchain.”
Commodities A basic good used in commerce that is interchangeable, or “fungible,” with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services For example, crude oil is a commodity that is used to make motor fuels, heating oil and lubricants.
Correlation The historical tendency of two investments to move together. Investors often combine investments with low correlations to diversify portfolios.
Consumer Price Index (CPI) A widely used measurement of inflation at the consumer level that helps to evaluate changes in cost of living. The CPI is composed of a basket of consumer goods and services across the economy and is calculated by the US Department of Labor by assessing price changes in the basket of goods and services and averaging them. Core CPI is the same series, minus food and energy prices, since they are considered to be volatile enough to distort the meaning and usefulness of so-called headline CPI. The absence of food and energy means that the core series reflects long-term inflation trends more accurately.
Diversification A strategy of combining a broad mix of investments and asset classes to potentially limit risk, although diversification does not guarantee protection against a loss in falling markets.
Diversification Benefits In modern portfolio theory, diversification is an approach used to potentially reduce the overall risk of the portfolio by holding a mix of assets with low correlations to each other. The potential benefit of holding uncorrelated assets is that some investments may rise while others fall. Diversification does not ensure a profit or guarantee against loss
Down Market Capture The percentage of return that an asset captures when a market benchmark is down.
Downside Risk A given security’s potential to lose value if a prevailing market trend suddenly changes. The term also refers to the specific financial amount of the “worst-case” loss that that can occur in such sudden shifts.
Drawdown A specific decline in the stock market during a specific time period that is measured in percentage terms as a peak-to-trough move.
Drawdown Protection Investments that could help insulate an overall portfolio from a decline in stocks or other financial markets. Examples include cash or other investments that have historically held up relatively well in down or volatile markets, such as gold or equity put options.
Economic Cycle Periods of growth or contraction in the economy, typically called periods of expansion or recession. Different sectors and industries typically perform differently based on particular phases of the economy cycle.
FTSE NAREIT All Equity REITS Index The index is a free-float-adjusted market capitalization-weighted index that includes all tax-qualified REITs listed in the NYSE, AMEX, and NASDAQ National Market.
HFRI FOF Diversified Index The index invests in a variety of strategies among multiple managers; historical annual returns and/or standard deviations are generally similar to those of the HFRI Fund of Fund Composite Index. A fund in the HFRI FOF Diversified Index tends to show minimal loss in down markets while achieving superior returns in up markets.
ICE BofAML US 3-Month Treasury Bill Index This is an unmanaged index that is comprised of a single U.S. Treasury issue with approximately three months to final maturity, purchased at the beginning of each month and held for one full month.
An overall increase in the price of an economy’s goods and services during a given period, translating to a loss in purchasing power per unit of currency. Inflation generally occurs when growth of the money supply outpaces growth of the economy. Central banks attempt to limit inflation — and avoid deflation — in order to keep the economy running smoothly.
LPX 50 Listed Private Equity Index The index is designed to represent the global performance of the 50 most highly capitalized and liquid listed private equity companies. The index is diversified across regions, private equity investment styles, financing styles and vintages. The reference currency of the LPX50 Index is EUR, CHF and USD. The index is available as a Price Index and Total Return (Net).
Liquid Alternative Trading Strategy Alternative investment approaches, including real estate, commodities, private equity, distressed securities and hedge funds that are available through relatively liquid structures such as ETFs, mutual funds and closed-end funds.
LBMA Gold Price The LBMA Gold Price is determined twice each business day — 10:30 a.m. London time (i.e., the LBMA Gold Price AM) and 3:00 p.m. London time (i.e., the LBMA Gold Price PM) by the participants in a physically settled, electronic and tradable auction.
MSCI World Index The index captures large- and mid-cap representation across 23 Developed Markets. With 1,644 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Real Assets Physical or tangible assets that have value and often are investable. Real assets include precious metals, commodities, real estate, agricultural land and oil; their inclusion in most diversified portfolios is considered appropriate.
Risk-Adjusted Return A risk-based profitability measurement framework for analyzing risk-adjusted financial performance; it is designed to provide a consistent view of profitability across different assets.
Rogers International Commodity Index The index represents the value of a basket of 36 commodity futures contracts. The index is a composite, US dollar-based total return index launched by James B. Rogers on July 31, 1998. The index represents the value of a basket of futures contracts on commodities consumed in the global economy, ranging from agricultural to energy and metals products.
Spot Gold Price The price in spot markets for gold. In US dollar terms, spot gold is referred to with the symbol “XAU,” which refers to the price of one troy ounce of gold in USD terms.
S&P GSCI Total Return Index The S&P GSCI Total Return Index in USD is widely recognized as the leading measure of general commodity price movements and inflation in the world economy. The index is calculated primarily on a world production-weighted basis comprised of the principal physical commodities futures contracts.
S&P 500® Total Return Index The version of the popular benchmark for U.S. large-cap equities that includes 500 companies from leading industries and captures about 80% coverage of available market capitalization in the US that reflects returns after reinvestment of dividends.
Tail Risk A type of portfolio risk associated with unforeseen events that lead to sharp declines in equities and a rush to safe-haven investments such as short-dated Treasuries or gold.
Up Market Capture The percentage return that an asset captures when a market benchmark is up.
Volatility The tendency of a market index or security to jump around in price. Volatility is typically expressed as the annualized standard deviation of returns. In modern portfolio theory, securities with higher volatility are generally seen as riskier due to higher potential losses.
Commodities and commodity-index linked securities may be affected by changes in overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent. Nothing on this web page constitutes investment advice and should not be relied upon as such. The value of units in the GLD ETF (the “Fund”) may fall or rise. Past performance of the Fund is not indicative of future performance. Distributions from the Fund are contingent on dividends paid on underlying investments of the Fund and are not guaranteed. Listing of the Fund on the HKEX/ SGX does not guarantee a liquid market for the units and the Fund may be delisted from the HKEX/ SGX. The Fund’s Prospectus is available from State Street Global Advisors or can be downloaded from http://www.spdrgoldshares.com/
The prospectus in respect of the Singapore offer of the shares in the Trust is available and may be obtained upon request from State Street Global Advisors Singapore Limited ("SSGA") (Co. Reg. No: 200002719D). Investors should read the prospectus of the Trust before deciding whether to purchase Shares. Shares in the Trust are not obligations of, deposits in, or guaranteed by, World Gold Trust Services, LLC, SSGA or any of their affiliates. The value of Shares and the income accruing to such Shares may fall or rise. You should consider whether the Trust is suitable for you. If in doubt, you may wish to seek advice from a financial adviser before making a commitment to purchase Shares. Investors have no right to request the Sponsor to redeem their Shares while the Shares are listed. It is intended that holders of Shares may only deal in their Shares through trading on the SGX-ST. Listing of the Shares on the SGX-ST does not guarantee a liquid market for the Shares.
Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. Brokerage commissions and ETF expenses will reduce returns.
Past performance is not a guarantee of future results.
Diversification does not ensure a profit or guarantee against loss.
Investing in commodities entails significant risk and is not appropriate for all investors.
Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826-7555. F: +65 6826-7501.
All forms of investments carry risks, including the risk of losing all of the invested amount. Such activities may not be suitable for everyone.
There can be no assurance that a liquid market will be maintained for ETF shares.
The prospectuses in respect of the offer of the units (the "Units") in the SPDR® Straits Times Index ETF, SPDR® S&P 500 ETF Trust and SPDR® Dow Jones Industrial Average ETF Trust (the "Funds") are available and may be obtained upon request from State Street Global Advisors Singapore Limited ("SSGA", Company Registration number: 200002719D). Investors should read the prospectus before deciding whether to acquire Units in any of the Funds. The value of Units and the income accruing to such Units may fall or rise. Units in the Funds are not obligations of, deposits in, or guaranteed by, SSGA or any of its affiliates. An investment in Units is subject to investment risks, including the possible loss of the principal amount invested. Past performance figures are not necessarily indicative of future performance of the Funds. Investors have no right to request SSGA to redeem their Units while the Units are listed. It is intended that holders of Units may only deal in their Units through trading on the Singapore Exchange Securities Trading Limited ("SGX-ST") of NYSE Arca Inc. (“NYSE Arca”) or any of the other exchanges where the Funds are listed. Listing of the Units on the SGX-ST of the NYSE Arca or any other exchange does not guarantee a liquid market for the Units.
The prospectus in respect of the Singapore offer of the shares (the ‘Shares’) in the SPDR Gold Trust (the ‘Trust’) is available and may be obtained upon request from State Street Global Advisors Singapore Limited ("SSGA") (Co. Reg. No: 200002719D). The value of Shares in the Trust and the income accruing to the Shares, if any, may fall or rise. Investors should read the prospectus of the Trust before deciding whether to purchase Shares. Shares in the Trust are not obligations of, deposits in, or guaranteed by, World Gold Trust Services, LLC, SSGA or any of their affiliates. You may wish to seek advice from a financial adviser before making a commitment to purchase Shares. In the event that you choose not to seek advice from a financial adviser, you should consider whether the Trust is suitable for you. Investors have no right to request the Sponsor to redeem their Shares while the Shares are listed. It is intended that holders of Shares may only deal in their Shares through trading on the SGX-ST. Listing of the Shares on the SGX-ST does not guarantee a liquid market for the Shares.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.
The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
The trademarks and service marks referenced herein are the property of their respective owners. Third party data providers make no warranties or representations of any kind relating to the accuracy, completeness or timeliness of the data and have no liability for damages of any kind relating to the use of such data.
Standard & Poor’s®, S&P® and SPDR® are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.