9Kitco News) – Gold’s supply-and-demand dynamics, diversification benefits and resilience across market environments are unique among all commodities, and the yellow metal should be treated as a distinct portfolio allocation, according to Jeremy De Pessemier, asset allocation strategist at The World Gold Council (WGC).
“Investors have long recognised the benefits of investing in commodities,” De Pessemier writes in the WGC’s Gold: The most effective commodity investment − 2026 edition. “Over time, they have been shown to improve portfolio diversification, offering inflation protection and an element of smoothing across economic cycles. Most investors access this asset class via commodity indices, which invariably include gold.”
But he argues that gold’s weighting in broad commodity indices fails to do justice to the yellow metal’s importance as a strategic component of investor portfolios. “Index methodologies typically rely on futures-market liquidity and/or production-based measures, neither of which fully captures the structure of the gold market,” he said. “Gold's liquidity extends beyond futures markets through deep OTC and ETF trading, while its available supply extends beyond annual mine production through a large above-ground stock that can be recycled, resold and reallocated. As a result, broad commodity indices may assign gold a modest weight even though its market depth, available supply and strategic portfolio role are greater than those weights suggest.”
And even though gold’s increased value has caused these allocations to rise higher, the World Gold Council doesn’t believe they provide enough exposure to gold. “Moreover, exposure to gold through a broad commodity index does not serve strategic investors optimally,” he added. “[R]ather, it results in roll costs, which – unlike most other commodities – are avoidable with physical allocation.”
De Pessemier describes gold as “a multi-faceted asset that enjoys diverse supply and demand dynamics.”
“Gold is, on the one hand, often used as an investment to protect and enhance wealth over the long term, but on the other hand it is also a consumer good, via jewellery and technology demand,” he writes. “This demand structure sets gold apart and makes it less sensitive to the business cycle. Indeed, during periods of economic uncertainty it is the counter-cyclical investment demand that drives up the gold price. During periods of economic expansion pro-cyclical consumer demand supports performance.”
De Pessemier then reviews the key investment characteristics that set gold apart from other commodities.
First, gold offers better overall returns than other commodities.
“Investors have long considered gold a beneficial asset during periods of uncertainty,” he writes. “Yet, historically, gold has generated long-term positive returns in both good and bad economic times. And when compared to commodities, gold has outperformed not only broad-based indices but also most sub-indices over the past 3, 5, 10 and 20 years.”
Gold’s diverse sources of demand also make it less volatile than other commodities. “As such, gold can enhance portfolio stability and improve risk-adjusted returns,” he noted.
The second key differentiator is gold’s effectiveness as a diversifier.
“Gold has important diversification properties that come into their own during periods of systemic risk,” De Pessemier writes. “In fact, gold has little to no correlation with many other assets, including commodities, underscoring that its role as a diversifier is distinct and cannot be replicated through broad commodity exposure alone.”
One crucial aspect of this property is that this correlation is dynamic, and it benefits investors as it changes across economic cycles.
“Like other commodities, gold is positively correlated to stocks during periods of economic growth when equity markets tend to rise,” he notes. “But importantly, gold is typically negatively correlated with stocks during risk-off periods, protecting investors against tail risks and other events that can have a significant negative impact on capital – a protection not offered by broad commodities.”
De Pessemier points out that gold is also a more effective diversifier than other precious metals such as silver, because they are more reliant on industrial demand.
He also shows that gold outperforms during periods of systemic risk. “In the Q4 2018 global equity selloff the MSCI USA index fell 14% and commodities fell 9%, yet gold rose 8%. And in the COVID selloff (Q1 2020), the MSCI USA index fell 20% and commodities fell 23%, while gold returned 6%,” he notes. “In both of these recent cases, gold not only protected portfolio assets but also delivered positive returns, while broader commodities behaved more like a risk-on asset.”
The third key investment advantage gold has over other commodities is its unmatched protection against inflation.
“While it is true that commodities have performed well during inflationary periods, gold has performed better,” De Pessemier writes. “And in periods of low inflation commodities delivered negative nominal returns while gold posted positive returns, reflecting increased demand when economic conditions are robust.”
And the fourth key differentiator that elevates gold above the rest of the commodity complex is its exceptional liquidity.
“Unlike most other commodities, investors can access gold in a number of ways – an important indicator of how gold operates within a differentiated market,” De Pessemier writes. “Overall, daily trading in the global gold market averaged US$373bn in 2025. The scale and depth of the market means that it can comfortably accommodate large, buy-and-hold institutional investors.”
Turning to gold’s impact on portfolios, De Pessemier point out that commodities generally account for les than 10% of total portfolios – with gold often less than 10% of that. “[I]n other words, most portfolios will have less than 1% exposure to gold,” he says. “And while commodities can help reduce portfolio volatility, our analysis suggests that adding a 2.5%–10% portfolio allocation to commodities would not have improved risk-adjusted returns over the past 20 years.”
Gold, he says, can do much more for portfolios than a basket of commodities. “Looking back over the past two decades, an allocation to gold provided two key benefits: it increased absolute returns and reduced portfolio volatility when compared either to a portfolio with no gold exposure, or one with only a broad-based commodity exposure.”
The final area De Pessemier examines are gold’s macro drivers.
“It is also worth examining the behaviour of commodities and gold in different market regimes,” he says. “Framing it this way – not via investment time periods, per se, but in actual economic and market environments – makes it possible to identify when commodities or gold may do better going forward.”
De Pessemier’s macro environment framework is divided into four phases, “‘QE-style goldilocks’, ‘Fear of the Fed’, ‘Recovery’, and ‘Risk-off’, with each phase defined by the direction of bond yields and corporate spreads,”
“Unsurprisingly, risk-off and QE-style goldilocks are the best environments for gold,” he notes. “The latter is also characterised by a higher equity-bond correlation.”
“But interestingly, gold provided positive returns in all regimes, providing more stable returns across cycle,” De Pessemier points out. “Commodities, on the other hand, do best in the recovery phase – an environment of resurgent economic growth twinned with rising inflation and interest rates – and they fare badly in a recession.”
While gold may be a commodity, De Pessemier says it’s not a typical one. “Its unique supply-and-demand dynamics, limited exposure to roll costs, diversification benefits and resilience across market environments set it apart from the broader commodity complex,” he writes. “For strategic investors, gold should therefore be considered a distinct portfolio allocation, complementary to – but not interchangeable with – a broad commodity exposure.”
