Gold has climbed by a phenomenal $339 an ounce since the start of July, proving its worth as a safe-haven investment, but the yellow metal isn’t the only commodity that can offer a refuge for investors.
“After all, no matter what happens to paper markets, physical commodities will still be in demand,” said Jason Schenker, president and chief economist at Prestige Economics LLC.
Gold prices are up 28% year to date. Other commodities have seen impressive gains as well, despite the bloodbath in the U.S. equities markets and often grim news on the global economy.
Year to date, silver’s up 31%, corn has added 13%, coffee’s up 10%. Heating oil’s added 13% and gasoline’s up 18%.
“Industrial metals, precious metals, and energy commodities are all real assets that are consumed,” said Schenker. “They are also much more homogeneous and fungible than other specific investments of a given financial asset class. As such, they are all a bit safer in the long run.”
Over the past 12 months, the Thomson Reuters/Jefferies CRB Index , which tracks 19 commodities representing all commodity sectors, has climbed more than 20%. The Dow Jones Industrial Average is up just 5.5% for the same period.
The “safe” commodities are those with consistent demand such as food, those with inelastic supply that can’t easily expand to meet rising demand, including coffee and cocoa, and metals with restricted supply locations such as platinum and palladium, said Christopher Ecclestone, a strategist at Hallgarten & Company LLC.
“The most dangerous commodities are those that have run up on purely financial factors,” he said, adding that gold and silver have led that pack. “Any removal of liquidity can cause a slump.”
In a class by itself
The implication that gold and silver may be “dangerous” commodities would certainly be hard for some investors to swallow. The words “safe haven” in the commodities world has been synonymous with gold — and silver too.
“Safe haven, to me, means that [the investment] will hold up if the economy tanks,” said Chris Mayer, editor of Capital & Crisis. “I can’t say that is true for any other commodity.”
Gold and silver were among the very few markets that managed to post gains on Thursday, with prices for gold up 1.6% as the Dow Jones Industrial Average dropped 3.7%.
“Nothing rivals gold’s safe-haven appeal at the moment,” said Evan Smith, co-manager of the U.S. Global Investors Global Resources Fund. “Gold’s drivers are financial not industrial use, so it is going to be insulated from fluctuations or downgrades in growth,” while the bulk of copper and oil usage is industrial so those commodities are “much more susceptible to swings in economic growth.”
And with economic growth seeing a slowdown around the globe, investors in economically linked commodities do have a lot to worry about.
“Many commodities are particularly vulnerable to a slowdown or double dip,” with copper, iron ore, coal, lead, zinc and nickel likely among them, said Mayer.
It’s “no surprise that China is a huge buyer of these — on the order of 35%-50% of world consumption depending on the commodity,” he said. “China is slowing down too so it makes sense that these commodities would be hard hit.”