Writing in the latest Gold Investor publication, the industry body said, “Gold does not fit neatly into the commodities category. It responds to several factors that drive currencies, and has a much lower correlation to the business cycle than the rest of the commodities complex.”
While it acknowledges that gold shares certain traits with other commodities, such as scarcity, consumption and fungibility, it said: “a detailed look at the makeup of supply and demand highlights that the differences outnumber the similarities”.
The first of these differences is the geographic spread of primary production. In contrast to most base metals (copper is the exception) which are overwhelmingly mined in Asia, gold production is fairly wide spread.
“In 2013, the largest producer of gold was China, with 15% of global mine supply. Eighteen countries represent a cumulative 80% of production, while only eight countries reach the same cumulative total in silver production,” the gold sector body said.
This, along with the fact that recycling of existing stocks makes up a significant portion of gold supply, means that supply shocks very seldom play a role in prices.
Adding to this point, The WGC said that the levels of above ground stock, which are fairly easily mobilised in times of need, emphasise a second difference between gold and other metals: “gold is held as a store of value, not consumed”.
On the demand side too, gold demonstrates its difference, particularly in terms of its relationship to the economic cycle.
According to WGC data, the metal is the least sensitive commodity to changes in global industrial production.
“This lower cyclical sensitivity in gold’s price behaviour is a factor that separates it from other commodities, including the other precious metals. This also makes gold a better diversification asset for equities, as equities also correlate well with industrial production,” it said.
These attributes are also related to gold’s displayed currency characteristics, the WGC said.
The third largest reserve asset after the US dollar and the euro, gold has a stronger correlation to year-on year changes in global broad money supply than the other commodities, the industry body points out.
“Gold is the only commodity that has a positive correlation to excess money supply, a marker of potential inflation and currency debasement. And gold has the strongest negative relationship to the US dollar.
As a result of these differences, the WGC argues, while many investors might view gold as simply part of the commodity complex and invest in one of the broader commodity indices, such a strategy is “suboptimal from a risk/return perspective”
“It should be viewed as a hybrid of commodities and currencies rather than being firmly entrenched in either camp,” it said.