Why commodities are not for you

June 10, 2010 at 9:10 pm Leave a comment

A well-written article on why we shouldn’t fall into the commodity bubble trap.

Long-term performance of commodities not improving
http://www.ft.com/cms/s/0/304cff2a-73cd-11df-bc73-00144feabdc0.html

The simple answer is that commodities generate no income – as opposed to, for example, equities, which generate the bulk of their long-term return from the reinvestment of dividends

The complicated answer is that commodities don’t deserve to generate any return. As the name suggests, they are undifferentiated lumps of naturally occurring materials. Value needs to be added to them by the application of knowledge; it is investment in that process of application that earns the return. Over the long haul the price of the commodities themselves reverts to the cost of production.

That is why the price of copper peaked out in ancient Egyptian times, when a few kilograms could buy you a slave girl. Its purchasing power has been in decline ever since. In essence copper has been in a bear market for 3,000 years. Consider that before you di-worsify

Entry filed under: Watch your step. Tags: .

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