Investing, economics, finance and random thoughts.
Quick Thoughts on Hard Assets
A question arises frequently by those looking to hold hard assets in a portfolio:
Should I buy commodities or gold for my asset allocation?
This question has been covered here before, but I’m going to give three short and sweet reasons why gold is superior to any commodity fund you can buy:
1) Gold is a commodity and is also a monetary metal. You can get the protection then of both. In 2008 when commodities crashed (losing 50% in value very quickly!), Gold posted 5% gains. When the banking system was in shambles, gold was viewed as a form of money independent of what overall commodity prices were doing.
2) I don’t think most people really understand how commodity futures funds work (I don’t and I admit it). Investors shouldn’t buy anything they don’t understand. Gold is simple.
3) Gold has a track record of responding very strongly to currency problems that no other asset possesses.
| Print article | This entry was posted by craigr on July 28, 2010 at 10:54 am, and is filed under Investing. Follow any responses to this post through RSS 2.0. Both comments and pings are currently closed. |
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Comments are closed.
about 1 month ago
Point 2 is particularly important IMO.
I started out investing in commodity based ETC’s which used futures funds. Even worse I used a leveraged fund. I was hurt by both fees and contango. One only has to look at the chart here http://retirementinvestingtoday.blogspot.com/2010/04/investing-mistakes-ive-made-contango.html to see the damage that can be done if you don’t know what you’re doing with these things
So for me know I’m still using ETC’s but it’s now the “plain vanilla” physical gold variety.
about 1 month ago
Yes, #2 could have saved me money as well in the past. I’m fanatic about understanding investments now. If I don’t know how an investment works, I don’t buy it. I don’t care how good it sounds or who is jumping on the bandwagon.
about 1 month ago
After researching it a bit, I noticed one stark difference between gold and commodities in general. Not sure if Harry Browne ever mentioned this, or if this is old news, but here it goes:
Most commodities will do reasonably well during periods of inflation. This is simple supply vs. demand economics with the exchange rate of dollars for commodities. The caveat is that some commodities will not do well if inflation reaches a point where businesses start to hurt causing industrial commodities to not do to well. Gold, being a money substitute, will probably do even better than most commodities during times of inflation as we saw in the 1970s.
Where gold really stands apart from other commodities, is that it appears that gold also does very well during times of deflation. Rapid deflation usually signals a depression, in which case people will want gold, and it will go up in price. Other commodities will plumet in value during rapid deflation. I think we have been seeing this during the last year or so.
So like you say, gold is a protection against currency problems, and can hedge against both inflation and deflation which makes it play a vital role in the PP that other commodities cannot fill.