Is Gold the Only Thing Worth Buying?

You'd have to be hiding in a pretty dark cave not to know about the long series of record moves that gold has made in recent weeks. What might surprise you, though, is that gold's performance over the past year, although definitely respectable, doesn't come close to what you could have earned from a host of lesser-followed commodities -- some of which seem unlikely suspects to have returns that dwarf those of precious metals.

Searching for confirmation
So many analysts are focused on commodities prices right now because there are differing opinions about the significance of gold's rise. Some point to gold's historical status as money, arguing that it's in a unique position to benefit from the lack of confidence in fiat currencies generally and the U.S. dollar in particular. With the Federal Reserve having increased its balance sheet by massive proportions, the federal government running unprecedented annual budget deficits, and indications that the rest of the world wants to move away from the dollar as a global reserve currency, these proponents argue that gold's rise stands on its own as just another indication that the dollar is ultimately doomed.

Others, however, look at gold's rise in a broader context of potential inflation. If the prices of all commodities are on the rise, then it may be an indication that inflation is approaching. If gold is rising while other commodities are falling in value, however, gold's rise looks much more speculative and less founded in inflationary causes.

Reverse alchemy
As it happens, gold's rise of about 32% year to date doesn't come close to the best performance out there. Although medieval alchemists were always trying to change lead to gold, investors have found better opportunities from the duller metals so far this year:

Commodity

Year-to-Date Change

Lead

123.5%

Copper

122%

Zinc

80.6%

Unleaded Gasoline

75.9%

Silver

62.4%

Sugar

56.5%

Corn

(9.5%)

Wheat

(19.6%)

Lean Hogs

(20.9%)

Natural Gas

(60.7%)

Source: S&P. As of end of November.

As you can see, commodities certainly aren't rising in lockstep. Base metals top the list of gainers, which undoubtedly has contributed to big gains for stocks like Teck Resources (NYSE: TCK  ) , Rio Tinto (NYSE: RTP  ) , and Southern Copper (NYSE: PCU  ) . In fact, when you consider both base metals as well as other precious metals like silver and platinum, gold is actually among the least impressive performers during 2009.

Other commodities, however, aren't showing anywhere near the same strength as metals. Agricultural commodities are a mixed bag, with sugar, cotton, and soybeans all posting gains exceeding 25% for the year. But corn, wheat, and livestock have seen substantial drops in price, which may be one reason why agricultural stocks like Archer-Daniels-Midland (NYSE: ADM  ) and Monsanto (NYSE: MON  ) have largely missed out on the rally since March.

The energy sector presents even more of a conundrum. As many predicted, the drops in crude oil and gasoline following last summer's energy bust were short-lived. Gasoline in particular has jumped from less than $2 a gallon to near $3 in some areas of the country, boosting big-oil stocks like BP (NYSE: BP  ) . Yet while natural gas has recovered from its lows of the year, it's nowhere near its highs from the energy boom, and stocks like Devon Energy (NYSE: DVN  ) are still well below their levels from mid-2008.

Drawing conclusions
Gold's rise has obscured the fact that some commodities are falling in price. That in turn supports the idea that not all the pressures in the struggling economy are inflationary, and so at least some of the support for gold and other precious metals stems from the same speculation that drove crude oil prices to record heights last year.

However, with such large disparities among various commodities' performance, the primary lesson for investors is that as with any other asset class, investing in commodities involves more than simply making selections at random from among available commodities. You need to have a thorough understanding of the different fundamentals affecting each commodity market before you can feel comfortable predicting where prices are likely to go in the future.

Gold's nice. But Jim Mueller has found one stock he thinks is even better than gold.

Fool contributor Dan Caplinger bought some gold years ago, but hasn't added any lately. He doesn't own shares of the companies mentioned in this article. Monsanto is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy has superpowers, but it can't see through lead.


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