Take the roster that makes up the S&P/GSCI Commodity Index (formerly the Goldman Sachs Commodity Index). GSCI is a production-weighted index comprising two dozen commodity futures traded in New York, Chicago and London. US crude oil contracts get the greatest weighting (39.5%). The European benchmark – Brent crude – accounts for a further 13.6%.
The first non-energy input is corn, in at No.7, with a 3.4% weighting. Gold is a middle-size component of the index, accounting for nearly 3% of the benchmark's weight. Feeder cattle, lead, silver, cocoa bring up the rear of the 24-item list, each getting a weighting of 0.5% or below.
Using the GSCI as a good (and commonly used) proxy for the broad commodity markets, which is the better diversifier – Gold or commodities?
The correlation between GSCI and gold is not particularly strong, which reflects the broad-based index's diversity. But over the past three years, gold's correlation to other asset classes has also been low – on average, half that of GSCI's. That makes gold a better portfolio diversifier, at least recently.
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