Stocks vs Commodities: where to put my money?

Oct 03, 2019 | Elaine Law


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The answer may be in these charts

Overview of Commodities

From time to time, investors ask us whether or not they should get into gold, oil, or other commodities. It seems that the commodity sector has the ability to excite certain investors, especially when the timing could be opportune. Before we answer these questions, let’s look at the below chart of the CRB index, to observe how commodities have performed over the past sixty years. The CRB Index is a basket of commodities, consisting of about 39% energy, 41% agricultural, and 7% precious metals, and 13% base/industrial metals in its composition.

Why the Interest in Gold?

Investors’ interest in gold has come roaring back in 2019, as interest rates have decreased, while uncertainty regarding US-China trade has increased. Moreover, Britain’s pending exit from the European Union and political unrest in Hong Kong have also pushed investors into assets (such as gold) that are deemed to be “safe havens.” Bullion is up about 15% this year, investors are betting that a “hard Brexit,” or a dollar intervention by the U.S. to lower their currency will drive gold prices even further, because gold and the U.S. dollar tend to move in opposite directions. Are these speculations correct? 

 

 

We believe that the answer lies in the above charts. The short-term chart appears to show that gold has recently broken out of the four-year trading range in June of this year. However, in the very short term, gold prices seemed to have peaked and are heading for a short-term correction. Over the medium term, the eleven-year chart shows that gold bullion prices have also broken out of the recent trading range, indicating that there may be some room for gold bullion to go up in the medium term.

However, like most commodities, gold prices are cyclical. Even though gold is only about 7% of the CRB index, gold exhibits similar cyclicality as the other commodities. If we return to the chart “Stocks vs commodities – 60 years”, we can see that commodities as a basket, tend to move in the opposite direction of stocks. This would indicate that over the long term, stocks are still outperforming commodities as a whole. Gold may still have its place as a small percentage in your portfolio, or as a trading vehicle. Stocks, on the other hand, seems to be on a very long-term, albeit volatile, uptrend.