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, the surge in the US dollar has been a major headwind for many commodities that are globally priced in US dollars, including gold. High levels of macro uncertainty are expected to continue as the Federal Reserve (Fed) and other central banks continue to projected higher interest rates heading into 2023 to bring inflation down closer to the Fed’s 2% target.1 The US dollar bull market may have some more room to run while the Fed continues to raise rates, but when the Fed pivots, we expect demand for US dollars to dwindle. Based on historical data, the latest bull market on the US dollar may be positive for gold, with gold historically outperforming a basket of broad commodities when the US dollar enters a bear market.2
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, 2022. BCOM = Bloomberg Commodity Total Return Index. GSCI = S&P GSCI Total Return Index. Past performance is not a reliable indicator of future performance.
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%.3 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 09/30/2022. 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 reliable indicator of future performance. 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 09/30/2022. 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 reliable indicator of future performance.
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, 2022. Gold is measured by LBMA Gold Price PM (USD/oz). Past performance is not a reliable indicator of future performance.
Gold: A Distinct and Independent Asset Class
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, the SPDR gold strategy team continues to monitor market trends and investor demand. Read the latest commentary here.
1 Bloomberg Finance, L.P., State Street Global Advisors, as of September 30, 2022. 2 Bloomberg, State Street Global Advisors. Data from 1/1/1973 – 09/01/22. Gold’s and a basket of broad commodities’ average cumulative returns were 145% and 53%, respectively, during US dollar bear markets. 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 reliable indicator of future performance. 3 Bloomberg Finance, L.P., and 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, 2022 per the relevant index provider. Past performance is not a reliable indicator of future performance.
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.
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.
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GLD and the World Gold Trust have each filed a registration statement (including a prospectus) with the Securities and Exchange Commission (“SEC”) for GLD and GLDM, respectively. Before you invest, you should read the prospectus in the registration statement and other documents each Fund has filed with the SEC for more complete information about each Fund and these offerings. Please see each Fund’s prospectus for a detailed discussion of the risks of investing in each Fund’s shares. The GLD prospectus is available by clicking here, and the GLDM prospectus is available by clicking here. You may get these documents for free by visiting EDGAR on the SEC website at sec.gov or by visiting spdrgoldshares.com. Alternatively, the Funds or any authorized participant will arrange to send you the prospectus if you request it by calling 866.320.4053.
None of the Funds is an investment company registered under the Investment Company Act of 1940 (the “1940 Act”). As a result, shareholders of each Fund do not have the protections associated with ownership of shares in an investment company registered under the 1940 Act. GLD and GLDM are not subject to regulation under the Commodity Exchange Act of 1936 (the “CEA”). As a result, shareholders of each of GLD and GLDM do not have the protections afforded by the CEA.
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