As one of the largest metals market, gold certainly has a place in a basket of commodities. It is included in all the main tradeable commodity indices:

But gold also differs substantially from other commodities and it is entirely valid to consider it as a stand-alone investment. The key differences are:

• 88% of gold demand reflects discretionary spending (jewelry and identifiable investment). This is unusual for a commodity where demand is usually driven by non-discretionary spending. This is true even for other precious metals, like silver and platinum, where only around a third of spending is discretionary. These markets are mainly driven by industrial demand and are consequently more exposed to the vagrancies of the economic cycle than gold, where only 12% of demand comes from the industrial and dental sector.

• Gold has a long history as a monetary asset, a use that it retains today.

• Gold is virtually indestructible, which means that practically all of the gold that has ever been mined still exists; much of it in near market form. This means the supply curve works in a different way from other assets. Supply can be readily mobilised from central bank reserves or by recycling gold from the jewelry sector or, to a much lesser extent, the industrial sector. The ability to mobilise scrap quickly and easily is one reason why the gold price tends to be less volatile than other commodities.   

Rolling 22-day historical volatility, 2002 - 2007

      

• Because gold can be easily transported and stored relatively cheaply, it is possible for investors to take delivery of the underlying asset. This would be impractical for other commodities, like oil and softs, which cannot be easily transported or stored.

• Collateralised gold futures offer investors the same type of returns as other collateralised commodity futures but gold is typically – not exceptionally – in contango, so investors should expect a cost of carry.

• Gold is a more liquid market – at least than other precious metals – with many ways to trade: coins and bullion, futures, commodities indices, structured products, equities and asset backed ETFs. 

 

Commodity Research Papers:

• What are Commodities? by Katharine Pulvermacher, March 2005
•  Investing in commodities: a risky business?  by Katharine Pulvermacher, April 2005
•  Commodity returns and the economic cycle by Katharine Pulvermacher, May 2005
•  The Size and Structure of Metals Markets: How Gold Compares with other Non-Ferrous Metals by Peter Kettle, August 2005
•  Metals & Backwardation by Gillian Moncur and Peter Kettle, September 2005
•  Indices Enticing Investors by Gillian Moncur, September 2005
•  What sets the precious metals apart from other commodities? by Rhona O’Connell, December 2005
•  Commodity Prices and the Influence of the US Dollar by Nikos Kavalis, January 2006

 

For additional research papers >>