Back in March of this year, we wrote a post entitled "What about commodities???" in which we noted that the steep rise in commodities prices had been generating the predictable interest in commodities that always arises when the stock market has done relatively poorly relative to commodities (the same phenomenon occurred in 2005).
As we noted then, commodities by their very nature have no value added to them -- that's why they are called commodities -- and therefore they do not increase in real value over time. Because of this basic fact, there is no real value to buying commodities "for the long run" -- they go up and down based on a variety of influences, but do not appreciate at a very significant rate over decades.
We have emphasized repeatedly (as we did in the March post on commodities) our conviction that long-term strategies for building and preserving wealth should be based on ownership of businesses that are consistently adding value, rather than on speculative calls on the relative market value of one asset versus another.
We made a similar point in our June 4 post on oil prices, "A hard look at the current price of oil and gasoline." In it, we argued that "Trying to 'play' the run-up in oil, which is caused by political and monetary factors that have little to do with the long-term fundamentals of business and which can reverse rapidly, is a shaky foundation for building long-term wealth and one we would strongly caution against." At that time, when oil was at $122 a barrel on its way to $145, anyone who said that oil would drop to $100 or less before it hit $200 would have been scorned by the pundits spouting dire oil predictions on all the financial media outlets.
Since then, the CRB has retreated about 17% from its July 3rd peak, and crude oil futures settled today down more than 23.5% from its July 3rd close.
As we have stated in a previous post, we believe that the Fed's easy policy since September last year has been the underlying cause of most of the rise in oil and commodities, and speculators noting the trend added more fuel to the fire. Since July and the possibility of a lift on some of the drilling bans in the U.S., much of the wind has been taken out of the sails of the speculators, although the underlying loose monetary policy is still a problem.
All of which is vindication for our observations at the time (when oil and commodities could "only go up and never go down") that playing that game is closer to Russian roulette than to anything that can be called "investing." In fact, not long before the July 3rd peak we noted in a June 23rd post that "this might be a good time for them [those who still think it's a good idea to bet on continuing increases in the prices of gold, oil, and other commodities] to ask themselves the famous line from Dirty Harry: 'Do you feel lucky?'"
For later posts on this same subject, see also:
- "The intermediary trap and the current bear market" 11/03/2008.
- "Avatar and long-term inflation" 03/02/2010.
- "Gold versus Apple" 10/25/2010.
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