The Risk of Gold, Silver, and Commodities Investing


As many commodities investors may be all too aware, the price of gold has fallen in recent months to the $1,200-$1,300 range and the price of silver has fallen to around $20 per ounce. With these price falls, investors in these securities are learning a painful lesson: there is no consolation for gold, silver, and commodities investing when prices decline. You are stuck. You are at the mercy of the market. The only ways for you to do well are to either buy more or wait for someone else to bid the prices up.

I do not own any gold or silver, and I would go nuts if I did. It does not suit my temperament at all. I would go crazy during market busts because you are powerless. You are helpless. Nothing good can happen to you until the price goes up to an amount above what you paid for it. End of story.

That is why I much prefer dealing with real, live, breathing businesses that give some of their profits to shareholders every ninety days in the form of a cash dividend. I’ll give you an example from my real life. As is probably the case for you as well, almost every stock I own has gone up substantially during the market rally of the past year or two. Should I elect to sell at today’s prices, I could realize a nice capital gain because the other stock market participants are willing to pay more for each ownership unit than they were a year or two ago.

One company I own that has not gone up is BP. I bought it in lots between $39-$41 and the current price is barely above that. But here is the fun thing—even if the other stock market participants do not bid the share price up, I get to benefit from the business performance of the oil giant every ninety days. For each share you buy, the British firm will send you $0.54 every day, and that amount is starting to go up every year again. If you owned 1,000 shares (a little over $40,000 worth of the stock at today’s prices), you would be receiving $2,160 in cash profits from the company this year.

If your goal is to live on $50,000 per year, BP is functioning as your own little oil well in the backyard, meeting 4.32% of your annual spending needs. Who cares if the stock price falls to $20 or rises to $60? You are covered as long as the business fundamentals remain strong enough to support the dividend on a long-term basis, and you will be receiving “a consolation prize” in the form of cash from your business holdings every ninety days even if the price of the stock is tumbling or stagnating.

This is the kind of stuff I have in mind when I say that you need to structure your assets in a way that allows you to reach your goals in a way consistent with your temperament and personal style. Even if gold skyrockets to $5,000 per ounce, it would still not be the right fit for my temperament because I would grow irritated by what would happen if the price of gold fell to $500 per ounce. There’s no cover in a tumbling market if you own non-productive assets. However, I like the idea of an oil business pumping out cash and returning that cash to shareholders regardless of its price at a given point in time. If you trace some of BP’s assets back to its Standard Oil days, it has paid some kind of cash dividend in 102 of the last 108 years.

Nothing is guaranteed life, but those are the kind of assets I want to wrap myself up in. Give me General Mills, which has been paying out dividends since the 1800s. Give me Colgate-Palmolive, which hasn’t missed a payment since 1895. Give me Procter & Gamble, which has paid some kind of dividend every quarter since becoming a publicly traded stock in 1890. Give me Coca-Cola and Johnson & Johnson, which have been raising dividends for over half a century. If you combine those quality companies together and put them on your personal balance sheet, you can create a system for yourself that always has money coming into your checking account. Those five companies alone will get you twenty different cash deposits each year. Munger was right. Drowning in cash is fun. Get those cash generators on your balance sheet. It’s hard to panic sell something that is putting cash into your bank account every ninety days. Unfortunately, gold cannot do that. But fortunately, we can accumulate assets that can.

Originally posted 2013-06-23 13:37:34.

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5 thoughts on “The Risk of Gold, Silver, and Commodities Investing

  1. says:

    I know that gold hasn't been one of the most stable investments lately, but it still has apperciated about 500% since 2001.

  2. says:

    It's true that gold as an investment generates no cash flow. Gold investors only make profits when gold spot prices soar high during tough economic times. So, I think that gold should be viewed as a long term investment and not as an investment vehicle for generating regular cash flow.

  3. The thing with Gold and Silver is to buy it when it is undervalued only!! If you want exposure to the gold price I would buy a Streamer or Royalty company like FNV Franco Nevada who pays a dividend around 2% monthly and moves more or less with the price of gold.

  4. Its quite obvious that investing in the various commodities also have the risk of loss. Buying of Gold and Silver should be done only when it is undervalued,that may lower the risk for sure.

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