According to Jeremy De Pessemier, Asset Allocation Strategist at the World Gold Council (WGC), gold should not be viewed simply as a conventional commodity. Its unique supply-and-demand structure, high liquidity, and diversification benefits give it a distinct role in strategic asset allocation.

Gold Does Not Behave Like Other Commodities

Most commodities, such as oil, copper, or silver, are heavily influenced by economic cycles and industrial demand. Gold has a much more diversified demand structure.

On one hand, gold is widely used as an investment and a store of value. On the other, demand also comes from jewellery and technology.

This creates an important dynamic:

• During periods of economic growth, consumer demand can support gold prices.

• During periods of market uncertainty, investment and safe-haven demand often increase.

As a result, gold tends to remain more resilient across different stages of the economic cycle.

Stronger Long-Term Performance Than Many Commodities

According to WGC analysis, gold has outperformed broad commodity indices and many commodity sub-sectors over the past 3, 5, 10, and 20 years.

Importantly, gold has not only performed well during crises. Historically, it has generated positive long-term returns across both strong and weak economic environments.

Its diversified sources of demand also tend to make gold less volatile than many other commodities, helping improve portfolio stability and risk-adjusted returns.

Strong Diversification Benefits

One of gold’s key advantages is its low correlation with many other asset classes.

During periods of economic expansion, gold can rise alongside equities. However, during risk-off periods, gold often moves differently from stocks and can help protect portfolios.

WGC highlights two notable examples:

• During the global equity selloff in Q4 2018, the MSCI USA Index fell around 14%, commodities declined 9%, while gold gained approximately 8%.

• During the COVID-19 selloff in Q1 2020, the MSCI USA Index dropped around 20%, commodities fell 23%, while gold returned approximately 6%.

These examples illustrate gold’s potential role as a portfolio hedge during periods of systemic stress.

An Effective Inflation Hedge

Commodities are generally considered useful inflation hedges, but WGC argues that gold has historically performed better across a wider range of inflation environments.

Even during periods of low inflation, when many commodities delivered negative nominal returns, gold was still able to generate positive returns.

This gives gold value not only during periods of high inflation, but also across different macroeconomic conditions.

Liquidity Is a Major Advantage

Another factor that sets gold apart is the size and depth of its market.

According to the WGC, average daily trading volume in the global gold market reached approximately US$373 billion in 2025.

Investors can also access gold through multiple channels, including:

• Physical gold

• Gold ETFs

• Over-the-counter markets

• Futures contracts

Gold’s supply structure is also different from that of traditional commodities. Beyond annual mine production, the large amount of above-ground gold can be recycled, resold, and reallocated.

For this reason, the WGC argues that gold’s weighting in broad commodity indices may not fully reflect its actual market importance and strategic role.

Gold Can Play a Distinct Role in a Portfolio

According to De Pessemier, commodities typically account for less than 10% of many investment portfolios, while direct exposure to gold may often be below 1%.

WGC analysis suggests that simply increasing exposure to a broad commodity basket does not necessarily improve risk-adjusted returns.

By contrast, a dedicated allocation to gold over the past two decades has delivered two important benefits:

Higher absolute returns and lower portfolio volatility.

This supports the view that gold should be treated as a distinct strategic allocation rather than merely a small component of a broader commodity basket.

Conclusion

Gold has several characteristics that distinguish it from the rest of the commodity market: diversified demand, deep liquidity, inflation-hedging properties, low correlation with many assets, and resilience across different economic environments.

For this reason, the World Gold Council argues that gold should be considered a distinct portfolio allocation, complementary to broader commodity exposure but not interchangeable with it.

This helps explain why gold continues to play an important role in long-term portfolio diversification and risk management.

This article is for informational and educational purposes only and does not constitute investment advice.

Source: Kitco