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Better Than Gold Thumbnail

Better Than Gold


Obviously I am not talking about NFL kickers with my chosen headline, as there is no one better than Gould when it comes to kicking a football.  What I am talking about is investment options for the average investor.  And when that is the topic, there are a whole lot of things better than gold.

A popular question over the last couple years has been whether or not gold, or commodities in general, should be a part of a typical investment plan.  As I read the year-end headlines, one that caught my eye was the beating gold took in 2013.  From its high water mark in mid-2011, gold is down about 35%, while the S&P 500 has increased by 44% over the past three years.  Gold is considered a safe haven, so it is no surprise that it would perform to the contrary of the stock market.  What gold and other commodities don’t offer is any kind of production value.  When you hold stock in a company, you are holding a piece of an entity that produces things for consumption by our society, things that will be needed to sustain our lives and standard of living.  When you hold a bond or CD, you are entitled to interest payments for the right of someone else to use your money for that specific period of time.  Commodities do not offer anything but the right to hold that commodity.

The best, and only practical use for commodities in the marketplace is as a hedge:  an airline company hedging fuel to lock in a known price for years in the future, or a factory purchasing futures contracts on the metals they need to produce the products they have already agreed to produce at a certain price.  In a roundabout way you are exposing yourself to commodities when you own stocks, through the companies that use those commodities to produce their products.  When the average investor buys a futures contract or a commodity, they are making a bet that the price of that commodity will increase.  This is no different than placing a bet on a football game, where Vegas has set the odds such that the betting public is split 50/50 on who will win the game when given the point spread.  With all of the large corporations employing teams of people to hedge their commodities for production, the price is set to the best of the knowledge of those individuals, and the rest of those making the bet have a 50/50 shot of being right.  Add transaction costs to purchases of those commodities and you have just lost your 50/50 shot of breaking even.  Much like juice works in the sports betting world.

The reason for my post is to try to convince investors to shut out the noise relating to this type of investing.  I couldn’t believe all of the commercials trying to sell gold to people, touting gold as being at an all-time high.  You don’t see car companies running ads that say, buy a new car now, prices have never been higher.  Knowing that gold prices are cyclical, if one was inclined to buy the commodity, at least do so when it is trading at a 3-year or 5-year low, with the mindset that it should go back up.  Or do the smart thing and just leave the commodities game to those people it was intended for, and let the stock market produce for you.

- Andy Fitzpatrick, CPA