As readers of this space know, I do most of the writing on the website. Thus I generally deserve the credit (and the blame) for the content. But recently I received a note from a particularly astute and thoughtful and experienced client (no need to embarrass him by naming him) on the subject of commodities and inflation. It’s certainly a topical theme these days. Here’s what he had to say:
I do think as a general matter that commodities have a role in most investment portfolios, primarily as a hedge against both inflation and the government’s continued success in devaluing our currency. The question is which commodities, what percentage of a portfolio they should be and in what investment format. I tend to favor the format of equity investment in commodities that are widely used throughout the world and will continue, as a matter of necessity, to be widely used.
First and foremost is oil and gas. Exxon and its peers will, in my view, be around and will prosper for a very long time – and they pay out good dividends at a rate that increases annually. Second is industrial metal such as copper – but these metals have proven to be somewhat volatile over time and most of the big producers are not US-based (think BHP Billiton, which is in O’Brien Greene portfolios) which means there is some currency and accounting risk (and a modicum of political risk). I am less enthusiastic about gold and silver because their volatility can be exceptional and they pay no dividends and because I think there are at present better income-producing opportunities in stocks.
When I started my own investing in 1970, a battle-weary market veteran told me I needed always to keep two things in mind: “the trend is your friend” and “don’t fight the Fed”. At present, the trend is to the upside and the Fed has made it clear that they are going to try and keep it that way. The trend and the Fed will change course eventually but for now I am comfortable with the mix of bonds and equities.
With the government printing money, as it has been for the last four years ( “Quantitative Easing” being the fancy term), it is indeed time to start talking about inflation. But selling earning assets like dividend-paying stocks to buy gold is an extreme measure, and as my astute client friend observes, there are less risky ways to deal with what is still a potential problem.