Does Investing in Commodities Make Sense Right Now?
Does investing in commodities really make sense right now? Some managers and leaders of investment firms certainly seem to think so. There are few voices louder in the 24 hour financial media those hedge fund and mutual fund bosses telling us about how gold is going to keep on going up and up and up. In reality, this is all psychology, and when you look back at the other bubbles in the financial markets, such as property, credit, and even back to the Tulips, you can see the same signs – the blind greed and attitude taking over, whereby people think an investment should rise… and it does, but instead of selling they blindly continue to dream that it will rise more, even though no thorough analysis of fundementals points in that direction.
This time, with the commodities markets, the bulls have the upper hand because commodities have very few technical methods of valuation anyway. The value of a commodity is simply the price people are willing to pay for it. Commodities such as gold may look nice and shiny, but they don’t provide growing cash flows like stocks, and therefore their prices are just the ‘result’ of a supply and demand equation – an equation that is increasingly being dominated by capital flows by greedy investors.
When retail investor begin to jump in on a trend – that’s when you know it’s time to sell out. Quite a few notable individuals have already sold their gold, but the rest of the market isn’t taking a head.
I’ve looked at several websites to see what their view is on whether Gold is a bubble. The owner of thegoldbubble.blogspot.com certainly seems the think so! Interestingly that blog closed to new posts in 2010 – I wonder what its owner would make of the gold price now, which is now hovering around $1,500.
From Financial Expert, How to Invest in Commodities has a less extreme but similar view. It doesn’t warn completely against investing in commodities, but it does advise to only place a tiny (1/20th) portion of your portfolio into it. Such that it will do the job of diversifying and smoothing the portfolio, but not taking a large position in order to make a massive gain. This sounds reasonable. What do you think?