Should You Buy Gold or Oil? 3 Reasons Why the Answer Is No

Lots of people have decided that gold (and other commodities) is the way to invest right now.  But should you buy gold?  Should you buy oil? They feel this way because they fear inflation.  And they think gold and oil are the best ways to fight the inflation they see coming.

It’s true that just about everybody thinks inflation is inevitable. When it kicks in, everything from energy to engagement ring prices are going to go through the roof.  Government bailouts and the global economy will eventually come together to make that a reality.  On the one hand, our government is printing money it doesn’t have at an unbelievable pace. This is a textbook example of how inflation is created.  On the other hand, the global economy is going to emerge from the recession at some point, and that’s going to increase demand – and prices – for goods and commodities.

So everyone agrees that it’s time to hedge your portfolios against inflation…but there is vast disagreement on how to do this best.

Some folks suggest that you should gobble up gold, oil and other commodities.  They also suggest that you buy U.S. Treasury inflation-protected securities or TIPS.  All these are no-brainers – at least to the people who tout these moves.

But I’m not sure these moves are the slam dunks they are reported to be. Here’s why:

1.  Nobody knows when the inflation train is going to pull into the station.

Sure the economy has improved, but it’s too soon to say that it’s actually stabilized.  Lots of people and business owners still declare bankruptcy every day. The improvement has come off a very deep recession.  We still see prices declining in many key areas of our economy – that’s deflation…not inflation.

Inflation isn’t usually an issue until people’s wages go up and push inflation.  We’re not near that point yet.

So while a move into gold may be very smart, make sure you make your move carefully.

2. If you would have purchased gold in 1980, you’d have paid over $800 once and it would have taken over 27 years for your investment to just break even. It’s usually not a good idea to make big bets on a very narrow asset class.

3. The same factors that will fan inflation – strong global economic activity – will also grow corporate earnings. That should help stock prices grow.

In fact, earnings often outpace inflation.  If that is the case, a diversified portfolio can help you take advantage of coming inflation with less potential risk than outsized bets on gold or oil.

If you have a sound and tested trading strategy – you may want to go for it.  But if you don’t, you’re probably going to be better off with a diversified long-term approach.

If all this logic still isn’t enough to keep your investment strategy restrained, please only consider small bets on narrow asset class investments.

What say you?  Are you convinced that gold or oil is the way to go?  What has your experience been with investing in these areas?