What Can Your Gold Do for You?

05/11/2011 2:40 pm EST


Paul Larson

Editor, Morningstar StockInvestor

The precious but recently depreciating metal is hardly a productive investment at its current price, writes Paul Larson, editor of Morningstar StockInvestor.

While last week will likely be remembered as one where the United States finally served justice to Osama bin Laden, in the markets it will likely go down as the week the commodities bubble finally popped.

Oil (USO), perhaps the most important commodity in economic terms, has gone from roughly $115 per barrel to $100 in a single week. But the real poster child for commodities speculation gone wild is silver (SLV).

Before this year, silver traded nearly all of the last decade below $20 per ounce. It then climbed a vertical wall to approach $50 per ounce about one week ago, only to break all the way down to below $35 per ounce today.

Ouch! This is one of the sharpest runups and reversals I've seen in some time.

Like all bubbles, there are some kernels of truth helping to feed the frenzy. First, I think there are good reasons to be fearful of inflation. (Or, to be more precise, a depreciating paper/fiat dollar. Wages and home prices are certainly not keeping up with the rising prices of raw goods.)

Likewise, there are resource constraints for nearly all commodities, and demand only continues to grow from emerging markets that are bringing their massive populations to modern living standards.

There are indeed real reasons to think commodity prices will be higher, perhaps significantly higher, in the decades to come. But in the short term, things in this part of the market have gotten entirely too overheated. (This view is essentially the same as what Jeremy Grantham recently shared in his quarterly outlook, which in my opinion is a must-read.)

But when it comes to gold (GLD), I see no reason to own it, especially at today's prices.

Allow me to relay what Warren Buffett said about gold recently in Omaha: If you took all the gold that has been mined in the world, you could make a cube roughly 67 feet long on each side. At current market prices, this cube would cost about $8 trillion. But you couldn't do much with this cube; you could stand on it or admire it, but that's about it.

Or, with the same $8 trillion, you could buy all the farmland in the US for about $2 trillion, ten ExxonMobils (XOM) for $5 trillion, and still have $1 trillion in walking-around money.

Both Buffett and his partner, Charles Munger, thought it was far better to invest in productive assets than commodities, and I couldn't agree more.

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