Commodities Investing - Be Careful

Commodities are the latest fad in investing. Finance websites and cable finance channels are rife with articles about the enormous upside available in commodities. These stories usually start by admiring the size of the recent run in many commodity prices, with the implication that momentum is all it takes and you should not risk missing a continued ride up.

Between stories there are loads of advertisements about how easy it is to get started and encouraging newbies to jump in. One of my favorites is a Lind|Waldock commercial where two apparent business associates are in an airport together. One is frustrated with his portfolio and the other encourages him to try commodities. In response to his skeptical “What do I know about pork bellies?” She replies, “Trade what you know. You know about gold don’t you?”

Obviously there is some chance that he is a gold expert and didn’t realize he could trade gold, but it appears more likely that his gold knowledge encompasses the jewelry he has purchased his wife, the recollection that Goldfinger tried to rob Fort Knox, and the concept that some people use gold to hedge inflation. His associate seems to confirm this suspicion when she tells him “you don’t have to worry about stuff like P/E’s.” As if making money in commodities doesn’t require homework. It might interest our subject to know a little more about the history of gold prices than the brief snapshot given by most analysts.



As shown in the chart, from January of 1980 to January of 2010 Gold had a compounded annual return of 2.2%. That was comprised of a -0.3% annual return from January 1980 to January 2006 and a stunning 20.5% annual return from January 2006 to January 2010. Most importantly, the lesson of the early 80’s must be remembered – like any asset, gold can go down just as quickly as it can go up.



Most disappointingly, on an inflation adjusted basis gold was actually down -1.1% over the 30 year period.