Lux Investing

What do you think about investing in commodities?

Some say it is risky but then again gold, cattle, and other commodities will likely never be worth nothing. Thoughts?

Public Comments

1. Like anything, Jay, you should do a bit of research. One point is that they offer no icome so you are relying just on capital appreciation. Also most are priced in US$ (OK if you have $). Some say the $ is going to be nearly worthless (also 30 years of inflation!!)
2. You are missing an important technical point about investing in commodities -- generally you are investing in derivatives (oh, no!) not the commodities themselves. So, yes, they can actually be worth nothing. There are some exceptions, like GLD the exchange traded fund that physically holds the gold it invests in, but most commodities investments are contract based. Commodities investments are really only one of two things: speculation or hedging. (I am not talking about people and businesses that actually buy, sell, or use the actual commodities in question) Hedging involves exposing a very limited amount of your assets to an "opposite condition" to what you "hope" will happen to protect yourself if you are "wrong." For example, you invest 50% of your money in stocks and 45% of your money in bonds but you put 5% in gold just in case the world melts down and inflation goes way up. In that "crazy scenario" your bonds drop 50%, your stocks go down 75% but your gold goes up 1000%, cutting some of your losses and giving you something to live on. You are actually "hoping" that your bonds go up by 5%, your stocks up by 25% and your gold down by 10%. Speculation, on the other hand, is the gamble that you are running a better than even chance of payout with a relatively high (let's call it at least 25%) chance of complete loss. If the ratio between oil and gas historically runs at X:Y and it is currently not at X:Y, you bet 1% of your speculative portfolio that it will return to the historical average in Z number of days. If you are wrong, you loose it all (1%), but if you are correct you gain 500%. Sidenote: Actually, if you are good speculator, you will most likely stop your losses at something less than 15% 2 times out of 5, breakeven 2 out of 5, and hit the home run 1/5...if you are just "good" you will still limit your losses, but hit a home run 1/10.
3. Commodities are notoriously unpredictable. Sometimes you can make good money trading in commodities for short periods of time. But it's easy to lose money in commodities and most ordinary investors who try them end up with losses. If you put a small percentage of your portfolio in commodities, you get some diversification that may be helpful. But don't bet heavily on them.