GOLD!!! – A Note on Commodities

By Craig Verdi, CFP®

Many people confuse Commodities such as gold, silver and copper as equity assets. They are not! Contrary to what the gold salesmen are pitching, the price of metals, crops, lumber or almost any commodity has never kept up with inflation. There are times when many things are cheap, such as steel is now. We have steel coming out of our ears. It is cheaper than cabbage. There will be a time when it bounces back and money will be made, but it does not appreciate against inflation over long periods. So my advice, in general, would be to never invest directly in commodities.

Investing in commodities is speculation. You have purchased a lump of something. It produces nothing. There are no dividends, no interest and no earnings. You need to hope that another person is willing to give you a higher price when you sell it. That is called the “greater fool” theory for a reason.

Wheat: 100 years ago wheat sold for about $200 per ton. Today it is about $500 per ton. That is an annual increase of 1.8%. There were short term spikes where speculators may have made money but there were decades where it never moved. Adjusted for inflation, wheat is about half of the price it was 100 years ago.

Gold: Gold was about $20 per ounce in 1850. Today it is about $1200. That is an annual rate of return of about 2.5%. Most of that gain came after the gold standard was nixed by Nixon. It was being held at $35.00 per ounce. By 1980 it hit $615. So some speculators made money over the 12 years from 1968 to 1980. But if you had bought gold in 1980 you would have had to wait until 2007 to get back to even! Twenty seven years with no dividends, no interest, and the cost of storing and insuring your lump of gold made it even more painful. Since 2007 we have had another increase to around $1200. So you didn’t quite double your money in 8 years. That is about a 9% rate of return. You have to really cherry pick to find the periods when you would have made money.

That is almost all I want to say about commodities. There are hundreds of people online and elsewhere who will tell you they have figured out the secret to trading commodities futures. When you find them, could you please send me the actual audited returns of a real investor net of fees? The returns are dismal. And your fund creates no earnings or dividends. Below are my two favorite explanations of why gold doesn’t work.

First, The Forbes 400 is printed annually. It is a list of the 400 richest individuals in the world. In the top 10, the individuals listed have all made their money from a company stock. Four of them are from Walmart stock. If we look at the top 400 we see that there are 3 ways people got there. The first way is to invent something, or be a founder of a fast growing company. Mark Zuckerberg, founder of Facebook, is #20. The second way is to own stocks over long periods of time, usually handed down over a generation or two. Six Walmart holders are on the list. Microsoft, Intel, Apple and others have multiple early stockholders who held on to their shares. The third way is through real estate. Farmland, industrial land or commercial property made these people some of the richest.

Who is not listed: Not one of the four hundred individuals acquired wealth by the passing down of a large lump or trainload of a THING. Not one family made it by owning a large amount of a commodity and letting it compound over several generations. Why? Because commodities don’t appreciate relative to inflation.

Second, a quote (paraphrase) Warren Buffet told CNBC during an interview in October 2010 of his thoughts on gold. He said if you took all the gold in the world it would create a cube 67 feet high by 67 feet wide by 67 feet long. The total value of that gold at the time of the interview was about 7 trillion dollars. He said for the same amount of money he could own ALL of the farmland in the United States (about half the country), 7 Exxon Mobils and have a trillion dollars of “walking around money” left over. He said, “call me crazy, but I’ll take the farm land and the 7 Exxons.” So would I. The annual income from those assets is billions of dollars. The annual income from gold is below 0 because of storage and insurance costs.