Watch the commodity trend lines
Oil, gold and the dollar all fell today. But commentator David Frum says when you're thinking about commodities, it's more important to watch the trend lines than to worry about the spot price.
Commentator David Frum. (David Frum)
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TEXT OF COMMENTARY
Kai Ryssdal: Gold prices fell just a hair today. Down about a buck to $1,030 an ounce. Oil was down. The dollar as well. But what matters when you're thinking about commodities isn't the spot price -- what something's trading for right now. You need to watch the trend lines. And those trend lines are talking to commentator David Frum.
DAVID FRUM: Many investors are worried about inflation in the United States. I don't share those worries personally, but it's always wise to hedge.
The favored hedge of the moment is gold, which has spiked to record prices, at least as measured in U.S. dollars. Gold has not performed nearly so well as measured in euros or even Canadian dollars.
For me, "record price" is almost always a sell signal. At almost $1,100 per ounce, gold looks less like a hedge, more like a bubble.
By contrast, oil is trading at a little more than half the peak price set last summer.
Oil has slumped with the global recession. President Obama's soft line on Iran has also soothed market anxieties about supply interruptions.
Still, if you fear the dollar will wither away, you'd think you'd want to put your dollars into a commodity that people actually use or alternatively the shares of companies that produce that commodity.
During our last inflationary spike, the late 1970's, the prices of gold and oil jumped together. As the inflation threat subsided, both prices tumbled but gold much faster than oil.
An investor who had hedged against inflation with gold would have lost half his or her investment in less than two years. An investor who had hedged with oil would have lost less and lost it slower. More time for his or her losses on the hedge to be balanced by the handsome gains that showed up in the rest of the portfolio after 1982.
None of this is to offer advice for the future. It's just a reminder that commodities too are subject to "irrational exuberance."
RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.
Comments
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11/01/2009
Once again, Frum misses his own point. He says it himself: Gold hasn't gone up if you pay for it in other currencies.
That means the dollar has dropped in value. This is a big story, and his free market theory won't explain it in a way he likes.
Meanwhile, is purchased in American dollars. So, if its price still goes down, does that mean the reason the price has stayed low, is due to simple demand dropping? If that's true, then what does that say about manufacturing? If it means there is less manufacturing, then why are companies doing so well in stocks? If they are producing less...do they make money by cutting labor? That too, is an important story.
From Philadelphia, PA, 10/30/2009
Finally! David does something besides spout partisan rubbish. Thank you! If he's going to be on the show, please keep it practical, not political.
10/29/2009
Its funny reading the post on Davids section. You already know that people will be bashing him regardless of what he says. David has a point, diversifying your portfolio is a good thing and investing in commodities is a decent strategy. However, I'm not about to suggest which commodity will be the best performer over the next couple of years. You can always buy a commodity ETF and bet on a basket full of them.
From Richmond, TX, 10/29/2009
Wow.. David has tuned up his camouflage.. You don’t suppose it is as simple as his oil investments are lagging? Hmmm.. Or, a previous boss has called in a favor to help the previous boss’ friends get back into 7 and 8 figure bonuses. Just a thought.
David's word manipulation puzzles are improving..
From Denver, CO, 10/29/2009
Since Mr. Frum is so consistently inaccurate in his perception of reality, that when he actually comments on an economic issue and not a political one, it is amusing to contemplate how one can gain dollar wise by moving in opposition to his view.
From San Antonio, TX, 10/29/2009
Good point Sam. That's why my 401k allocations are currently in foreign and real estate. I've done pretty well so far.
10/29/2009
Obviously if the price of gold is not falling relative to other currencies, then it is not gold that is rising, but the dollar that is falling.
The purpose of David Frum's commentary is to obfuscate this fact.
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