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Commentary

Watch the commodity trend lines

Marketplace Staff Oct 28, 2009
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TEXT OF COMMENTARY

Kai Ryssdal: Gold prices fell just a hair today. Down about a buck to $1,030 an ounce. Oil was down. The dollar as well. But what matters when you’re thinking about commodities isn’t the spot price — what something’s trading for right now. You need to watch the trend lines. And those trend lines are talking to commentator David Frum.


DAVID FRUM: Many investors are worried about inflation in the United States. I don’t share those worries personally, but it’s always wise to hedge.

The favored hedge of the moment is gold, which has spiked to record
prices, at least as measured in U.S. dollars. Gold has not performed
nearly so well as measured in euros or even Canadian dollars.

For me, “record price” is almost always a sell signal. At almost $1,100
per ounce, gold looks less like a hedge, more like a bubble.

By contrast, oil is trading at a little more than half the peak price
set last summer.

Oil has slumped with the global recession. President Obama’s soft line
on Iran has also soothed market anxieties about supply interruptions.

Still, if you fear the dollar will wither away, you’d think you’d want
to put your dollars into a commodity that people actually use or
alternatively the shares of companies that produce that commodity.

During our last inflationary spike, the late 1970’s, the prices of gold
and oil jumped together. As the inflation threat subsided, both prices
tumbled but gold much faster than oil.

An investor who had hedged against inflation with gold would have lost
half his or her investment in less than two years. An investor who had hedged with oil would have lost less and lost it slower. More time for
his or her losses on the hedge to be balanced by the handsome gains that showed up in the rest of the portfolio after 1982.

None of this is to offer advice for the future. It’s just a reminder
that commodities too are subject to “irrational exuberance.”

RYSSDAL: David Frum is a resident fellow at the American Enterprise Institute.

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