Never Invest in the Commodity Market

Stating the obvious sometimes seems unnecessary.  Yet, people are willingly buying into the fad of ever more specific ETFs being created in seemingly every permutation of underlying asset classes which now unfortunately includes commodities.  If you put something in their face, they will buy it. There is no rationale for adding room for passively adding commodities to your portfolio.  Veer clear of the commodity market.

The slight benefit of improved diversification is outweighed by the huge drawback of it providing no real returns with sometimes large volatility.  Commodities do not generate income like other assets and rely solely on the greater fool theory to ever make a profit.  To read a more eloquent rationale for avoiding gold, check out Warren Buffett’s 2011 Letter to Shareholders:

http://www.berkshirehathaway.com/letters/2011ltr.pdf

Ignore for a second the high management fees, low trading volume, and wide bid/ask spreads.  Who would choose to “invest” in an asset that has performed just marginally better than cash over the last 200 years (see Common Sense on Mutual Funds by J. Bogle)?  To make matters worse, the commodity market can be subject to significant volatility and thus a speculative commodity position offers atrocious risk-reward ratios.

Heretofore, to avoid confusing the reader I will refer to speculating in commodities as hoarding instead of using the term “investing.”