Natural gas, the worst-performing and most volatile commodity of the past decade amid a glut in supply, is replacing gold as a haven for commodity investors as the metal slumps.
The heating and power-plant fuel produced the best risk- adjusted returns of 24 commodities in the Standard & Poor’s GSCI index over the last 12 months, rebounding from the worst ranking in the prior 10 years, the BLOOMBERG RISKLESS RETURN RANKING shows. Gold, the decade’s top performer, and silver tumbled as a stock market rally and a rising dollar curbed demand for the metals as a refuge.
Power plants and factories are stepping up their use of gas after a surge in production of the fuel from shale formations pushed prices to a 10-year low last year. Rising demand may make historically volatile gas a haven, Jeffrey Currie, head of global commodities research at Goldman Sachs Group Inc. in New York, said in an April 16 research note. Banks from Goldman Sachs to Citigroup Inc. are boosting their forecasts for natural gas prices while cutting their estimates for gold.
“Natural gas is emerging as a clear winner among commodity investments,” Teri Viswanath, director of commodities strategy at BNP Paribas SA in New York, said in a phone interview on May 1. “The late-winter rally has fueled expectations that gas will outperform alternative investments in the sector.”
Natural gas futures for June rose 4.3 cents, or 1.1%, to $3.963 per million British thermal units on the New York Mercantile Exchange at 1:05 p.m. today. The futures have advanced 65% over the past year. Gold for June delivery on the Comex in New York climbed 1.3% to $1,468 an ounce. Silver for July delivery gained 0.4% to $23.905 an ounce. Gold is down 9% over the past 12 months and silver 19%.
Gas has climbed a risk-adjusted 0.7% over the past year, followed by unleaded gasoline and corn, both with 0.5%, data compiled by Bloomberg show. Gas showed the best improvement by risk-adjusted return from the previous 10 years.
The 24 commodities in the GSCI index had an average 0.2% risk-adjusted decline in the 12 months through yesterday. Silver had the worst reversal in risk-adjusted returns, followed by copper and gold. Gold, the best commodity by risk-adjusted return in the prior decade, fell to fourth from bottom.
The risk-adjusted return, which isn’t annualized, is calculated by dividing the total return by the volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.