Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, May 6, 2011

No Tree Grows to the Sky!

An old Wall Street Adage, “No Tree Grows to the Sky”, seems to be good advice once again. In the last few days we’ve seen commodity prices drop rather significantly after large recent price increases.

Silver has dropped 8 percent on Thursday alone, oil prices 8.6 percent and copper 3.3percent. As reported in Thursday’s Wall Street Journal (May 5th), silver had dropped 19 percent since the previous Friday.

Gold was down $34 an ounce yesterday, as well, to $1480.90 an ounce. Gold recently reached a high of more than $1540 an ounce. Gold has been on a tear for some time.
One can’t turn on the TV without seeing several ads to “Buy gold now”.

We have cautioned our readers for some time about buying gold, only to continue to watch it rise higher and higher. For those who limited their allocation to a modest amount and set a target price at which to take their profits, an investment in gold likely proved to be quite good.

Unfortunately many investors get greedy and continue to invest more and more as the price rises and peaks. Then when it drops quickly, they lose most, if not all of their gains.

Gold may continue its rise still further. We prefer broader allocations to commodities rather than investing in one metal alone. Even then, commodity investing isn’t for the faint of heart. You need to have a long-term orientation and avoid over-allocating too much to this one asset class.

We wouldn’t be surprised to see more downturns in commodities in the short run. Today’s Wall Street Journal’s feature article titled “Commodity Prices Plunge” by Liam Plevin notes: “But commodities investors and analysts say that the global appetite for natural resources remains robust, which is likely to keep prices from falling dramatically for long.”

We believe commodities should be included in most investors’ portfolios as a hedge against inflation. Commodities also have a low correlation to other more traditional asset classes. That helps reduce overall portfolio volatility and increase long-run portfolio returns. You just need to take care as to how you invest in commodities and how much you invest in them. If you are unsure of how to do so, we suggest you seek professional help.

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