Larry, I have a question for you. You’ve kind of steered us away from market timing. So, let’s assume that our listeners are buying it. I don’t know if they are or not, but let’s assume that they are. Okay, we don’t want to time the market. How would you compare the long-term return of commodities either on a risk-adjusted or not risk-adjusted comparison to let’s just say the S&P 500 or a well-diversified portfolio of stocks over time?
So, are we going to do better? Well, I know the answer you’re going to tell me does a lot worse, but I think it would be good to hear directly from you because I have friends who say, “Oh, I’m going to be in gold, and you guys are going to get nailed, and I’m going to be in heaven.” But let’s assume somebody is a long-term player. They’re not a timer. How have commodities done in the long run?
Well, to answer that question since you raised the issue of gold, let’s take this and split it into two parts, Jim. Let’s deal with gold, and then I’ll deal with commodities in general, because people often people think of gold as an inflation hedge as well. And they’re partly right and mostly wrong. They’re partly being right results from the fact that if your investment horizon is like a century or longer, gold has acted as a relatively good inflation hedge. So, there was actually an interesting study done that looked at how much or what was an ounce of gold capable of buying you when Jesus walked the earth, and a Roman Centurion was able to buy a good suit of clothes they estimated to do that. Today with gold at $1,900 or so an ounce, I would argue that it’s about the same thing. Your suit of clothes if you’re buying a really nice suit of clothes might be in that range, probably even less than that.
So, gold has not added any real return for 2,000 years. That’s a God-awful investment, even if it did hedge inflation. So that’s a problem. You could have earned much higher returns on even any safe bonds let alone equities. The second point I want to make about gold is that it cannot be a good inflation hedge over any normal horizon. And the best example of that is the period from 1980 through 2002 (about 22 plus years), and gold lost about 86% of its value in real terms. It dropped from about $850 to the high $200s, and inflation was running at 4% a year for 23 years. I don’t know how anyone can claim gold could be an inflation hedge when that can happen.
A hedge acts one-for-one against it. Gold should have been rising 4% a year. Instead, it fell dramatically losing two-thirds of its value when inflation was running up in that way. Now, there are periods when gold does exceptionally well, and that’s what attracts people. From 2003 through 2017 or 2018 or so, it had a spectacular period rising from about $300 all the way up to about $2,000. And then it’s done nothing since for the last four years or something like that. So, unless you’re a great market timer and can see those things, in my opinion, gold really doesn’t belong in a portfolio. I don’t see a role for it though it does have some hedging ability of geopolitical risk. It tends to do well. So, if you want to have some there, that’s okay, but it’s not an inflation hedge, and you should not expect good returns.
Commodities have zero real expected return. That’s what the evidence says over the long term as a general rule, just like gold. So, they do not act as an investment. I would not think of them that way. Again, if you want somewhat of a hedge against geopolitical risk, maybe inflation, then commodities may be okay, but you better have discipline and stay the cost, which means you have to buy, buy, and keep buying for those decades sometimes where they’re doing poorly. Do you really have the courage so that you’re really there and able to reap the benefits when you get those big run-ups like you’re getting today? My experience is that most investors can’t do that. They’ll bail out at some point. So, I’d recommend not doing so.