Commodity Performance

I like shiny objects

Commodity investing is diverse. There are precious metals like gold and silver. There are agricultural products (investments you can eat!) like corn and wheat. There are also non-agricultural components like oil (don’t eat that).

Let’s look at how these commodities have performed since just before the financial crisis. We have GLD and SLV for gold and silver, DBA for agriculture, USO for oil, and GSG which is a combination fund of many commodities:

It’s immediately obvious that gold and silver have outperformed non-precious metal commodities. One driver is the way these funds are constructed. For gold and silver, you can just buy these commodities and hold them. It’s harder to do that with corn or big smelly barrels of oil. So, there are more hidden costs to the non-precious metal funds because they often use more complicated strategies to mimic underlying price performance and that eats away at returns over time. Oh, and those underlying commodities haven’t really done well either (you can see the crisis-era bubble that has since popped).

The bottom line, in my opinion, is that commodity exposure should really just be precious metal exposure. Even if non-precious metal commodities appreciate going forward, I haven’t found any funds that are attractive investments. Precious metal funds can more accurately match price performance. And, it helps that you can’t just grow a bunch of gold or silver in the same way you can grow corn or wheat. That creates more predictability on the supply side.

I say all this from experience. I invested in GSG for about three years because I was interested in broad commodity exposure. It didn’t do well. I literally made back my entire loss on that investment in a single day by rotating into TQQQ (a triple leverage tech fund) at the bottom in March. It was nice to cover that loss - though I didn’t continue to hold TQQQ which subsequently quadrupled. Oops! So, yeah, stick to precious metals.