Our Insights

About personal finance, investments and markets.
November 1, 2014

Should you own commodities and gold?

Investing in commodities promises big gains. The global population keeps growing and people in the Emerging Markets are getting richer, thus fuelling demand for more commodites. This is the bull case for investing in commodities. But is it correct? Should commodites be part of a diversified portfolio?

Our clear answer for private investors is to stay away from commodities. Commodities are for traders, not for long-term investors. The historical data are very clear: commodities offer lower returns than stocks and have a higher volatility which makes them unsuitable in most cases.

Since the early 1990s, investors have been able to access investment vehicles that give them exposure to commodities. We have looked at the historical data of the two most used commodities indices,  the S&P GSCI and the DJ UBS index and compared them to the S&P 500 and cash. The results are disappointing for advocates of commodity investing: over a nearly 25 year period, these two commmodity indices offfered returns far below the S&P 500 while experiencing much higher volatility. This is the exact opposite of what you would like to see from a long-term asset class. The poor returns are easily explained: commodities are really just materials and input costs but they do not pay dividends like stocks or income like bonds.

Tabelle English

What about the argument that commodities are a good diversifier and help to reduce the overall level of volatility in a portfolio? This claim is also not confirmed by historical data: The Bank for International Settlements has shown that the opposite is true. Adding commodities actually comes at the price of higher portfolio volatility because commodities are positively correlated with equities. Therefore the popular view that commodities are to be included in one’s portfolio as a hedging device is not grounded. 2008 is a good example: at a time when investors needed protection against falling equity prices, the S&P GSCI index dropped 20% more than the S&P 500 equity index.

Our conclusion
It does not make sense to include commodities as a permanent position within a portfolio. Commodities are much more conduicive to trading than investing. The best time for commodities is typically towards the end of a business cycle when inflation is picking up but with the global inflation rate stubbornly staying very low we remain far away from that scenario. Our view is that commodities got overhyped and over-loved over the 2004-2011 period and we are now going through a long and painful period of mean reversion.

The same holds true for precious metals, gold in particular. Gold has lost more than 40% since its high in 2011 – which clearly shows it does not deserve the notion of a safe investment. We believe that gold is a deeply flawed investment vehicle that is hurting a lot of retail investors who have listened to the predatory promoters with business models designed to stuff these investors with their products. We feel bad for retail that got scared into gold over the past few years by the hucksters and charlatans selling shiny rocks at a mark-up. Yes, gold was performing well for a couple of years but 2014 is not 2008. Back then, we were in crisis mode with lots of questions what the Fed’s aggressive balance sheet expansion would do to inflation. Today, the economy is continuing its aneamic recovery and inflation is only a worry for the tin foil hat crowd. Gold will find it hard to make a durable bottom soon.

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