Mainstream media, economists and journalists alike love to lump gold in with other commodities. They put it on the same level as oil, copper, wheat, nat-gas and any other thing you can dig out of the ground. While Gold is in fact a metal you must dig out of the ground, it is a mistake to call it "just another commodity." Gold's recent price performance proves it is anything but just another commodity. It is the superior safe haven asset to own in times of financial duress and uncertainty.
Since the new year, the market has shown decisively that gold is a unique asset that must be approached differently than other commodities. Here is a chart showing the price of gold against major US domestic indices since the beginning of the year.
The chart is powerful. Regardless of what is behind the downward pressure on prices, be it European Bank System woes, China's capitulating stock market and massive capital outflows, or the creeping realization that Janet Yellen and other central bankers cannot effectively manage the economy, the picture is clear. In times of financial duress, capital flows into gold.
What about other commodities? Does capital flow into oil or livestock during times of financial uncertainty and risk? They are "hard assets" and not paper claims to an asset. Shouldn't they behave the same way as gold? Here is a chart comparing gold to some popular commodities over the same time period.
This charts shows the relative price performance of gold against $Copper, $Brent, $Natgas, and livestock as $GVX. The middle of last year, right around July marks a midpoint in the above chart. At that time, all of these commodities, except gold, began to trend decisively lower. Oil led the charge with a breathtaking 60+% decline in price. Only recently has it shown signs of cooling off. But the damage has already been done for companies who were banking on a higher price. (Banking used in a literal sense here in that capital is tied up long term in these enterprises and if found to be marginally unprofitable, must be chopped up and sold off in bankruptcies).
Though more gradual, copper's performance looks just as painful. Gold however, represented by the red line, was resilient and just recently started its double digit price ascension from $1060/oz all the way up to $1250/oz. A 17% move in less than 2 months! There is an obvious difference between gold and other commodities but the magnitude of difference is noteworthy. The following chart puts this into perspective.
There is not a single commodity listed above that falls within a 20% range of gold's price performance over the past year!
The difference between gold and these other commodities should be obvious. Gold attracts capital flows in ways that these other commodities do not. This is especially true during times of financial uncertainty, increased perceived risk, and global fears of entering a prolonged period of economic recession or depression. Gold's recent price performance has confirmed this thesis.
Many investors like to group all "hard assets" or commodities together thinking they must all perform the same in a number of different scenarios. Since they aren't represented by paper, they are considered hard assets. This often means that gold and oil are put in the same category. They shouldn't be. For one, oil has some serious storage issues compared to gold. Secondly, the price of oil is very sensitive to potential changes in the above ground supply which is pretty limited. That is not the case with gold. There are decades' worth of gold production above ground flowing to whoever wants it most. Finally, oil's dramatic price decline against the resilience and strength of gold should show once and for all that gold has unique properties which make it superior to oil and other hard assets in a myriad of economic scenarios. In times of financial uncertainty, people don't buy a broad basket of commodities. They buy gold. Gold is not just another hard asset. It is the superior safe haven financial asset in a world where financial assets are becoming increasingly risky.
Disclosure: I am/we are long GOLD AND SILVER.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: $Copper, $Brent, $Natgas, $GVX Can those be added as tickers?