TheEconomicSurvivor.com: Gold is different than other commodities

Gold is different than other commodities

In his wonderful book A Gift to My Children: A Father's Lessons for Life and Investing, famed investor Jim Rogers states that gold is no different than any other commodity. He writes:

In 1980 everybody wanted to own gold. The price had skyrocketed to over$850 per troy ounce. But one could see that gold was being overproduced; after all, a supplier is bound to increase production for anything that rises in price. A lot of people bought gold at this inflated price, insisting that it was somehow different from other commodities. Boy, were they wrong…By the year 2000, the price of gold had sunk to about $250 an ounce.

Rogers is correct that gold, silver and other precious metals are subject to the same economic fundamentals of supply and demand as any other commodity. Therefore, like other commodities the price will bubble up, and then pop and deflate once supply outpaces demand. However, precious metals such as gold,silver, platinum and palladium, are different from other commodities in that you can ride out the down times.

Unlike agricultural commodities precious metals exist in a finite supply. When the price of corn skyrockets we can simply grow more corn. But precious metals cannot be grown. Once they are exhausted they will never exist again.

Precious metals also differ from agricultural commodities in that they are non-perishable. Gold will last forever. You can go to museums and see gold coins and jewelry from ancient civilizations that existed thousands of years ago, and thousands of years from now your gold coins will still exist as well.

Precious metals can also be easily stored, transported and sold. Oil and gas are also finite and non-perishable just like precious metals, but unlike precious metals oil and gas cannot easily be stored, transported and sold. You can keep $1,000 worth of gold in your pocket, but to store $1,000 worth of oil would take up your entire garage. Try selling your barrels of oil at the local pawn shop or on ebay. Even if you found a buyer on ebay the shipping costs would be astronomical. You can’t just FedEx ten barrels of oil to the highest bidder.

The nature of precious metals as a finite, non-perishable commodity that is easily stored,transported, and sold makes it different from other commodities. Because of these characteristics, precious metals are a lower risk investment than other commodities. The reason is that you can hold your precious metals for long periods of time until the next boom and then sell. As Rogers explains in his book,commodity prices rise and fall in 14-25 year cycles. That means the price of precious metals will go up again and if you don’t panic and sell when the price has dropped, you can recoup your investment later. Just have patience and the price will return to a level more conducive to your selling it. If you buy gold today at $1,200 an once and the price drops to $200 an ounce tomorrow, just stick the gold in a drawer and wait for the price to go back up. It may take 30 years, but eventually it will go up again. Of course you may just break even (as adjusted for inflation) as it is always best to buy low and sell high, but there is something very comforting in knowing you won’t lose everything on an investment.