Do you hold commodities?

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PurpleArc
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Do you hold commodities?

Post by PurpleArc » Sat May 23, 2020 7:35 pm

Thanks to Ray Dalio, I've started thinking about all-weather, and one of the assets class that intrigued me, from Ray and Jim Roggers' books is that commodities (grains, softs, livestocks notably) are much more real than others such as stocks. In good times and bad times people always need to eat.

1) Are you guys going into commodities and your take on the new VCMDX.

2) Oil which is part of energy commodities, I am short term bullish (V shape) but long term bear (renewables, fracking breaking OPEC monopoly). Energy/oil gets lump into VCMDX as other more "real" commodities like grains and livestocks, fairly so since they are both commodities, but do you think it should be viewed seperately?

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Re: Do you hold commodities?

Post by Trader Joe » Sat May 23, 2020 7:57 pm

PurpleArc wrote:
Sat May 23, 2020 7:35 pm
Thanks to Ray Dalio, I've started thinking about all-weather, and one of the assets class that intrigued me, from Ray and Jim Roggers' books is that commodities (grains, softs, livestocks notably) are much more real than others such as stocks. In good times and bad times people always need to eat.

1) Are you guys going into commodities and your take on the new VCMDX.

2) Oil which is part of energy commodities, I am short term bullish (V shape) but long term bear (renewables, fracking breaking OPEC monopoly). Energy/oil gets lump into VCMDX as other more "real" commodities like grains and livestocks, fairly so since they are both commodities, but do you think it should be viewed seperately?
No, I do not invest in commodities.

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Re: Do you hold commodities?

Post by nisiprius » Sat May 23, 2020 7:59 pm

I do not. In 2008, I posted:
Although it is very fashionable at the moment in this forum, and in the wise books written by some of its members, to suggest that commodities are useful and important in an ordinary investor's portfolio, I think you would be very hard put to find any mainstream, sensible investment books from a decade or more ago that suggest this.

I am not a particularly wise or sophisticated investor, but I try to avoid great big mistakes. And I try to avoid being "trendy." And I try to stay away from stuff that I literally know nothing about.... or at least, investments about which I know nothing more than that some writer likes them. If all your friends are arguing about which commodity fund is best, it's hard not to feel that one should have a commodity fund. But knowing what your friends and financial writers are writing about is not knowing about the investment itself....

Andrew Tobias, not writing about commodity funds, dismissed commodities per se with one sentence in "The Only Investment Guide You'll Ever Need:"
It is a fact that 90% of all people who play the commodities game get burned. I submit that you have now read all you ever need to read about commodities."
Add to that the experience of a friend who likes to tell about "how I turned $7500 into $7500 on the commodities market" (he passed through $500,000 in between).

So I'm sure as heck not going to make an individual investment directly in the commodities market. I think that means I don't know what commodities are, and therefore I'm not going to invest in commodity funds, either.

Now add to that that neither Vanguard nor Fidelity includes any commodities at all in their target retirement funds.

I say commodities are trendy and I say I'm waiting another decade before I get in.
I'm glad I waited.

Now, Fidelity actually did add a "commodities" (collateralized commodity futures) fund to its target date fund, and in 2018 Reuters wrote
Fidelity retirement funds take multiyear hit from commodities bet
Fidelity Investments’ bet on commodities for its flagship retirement funds has declined 38 percent over the past five years, while top rivals have avoided the sector altogether or made money with more-conservative strategies.
In the 2008 time frame, one of the most commonly mentioned and often praised commodities funds was the PIMCO CommodityRealReturn Strategy Fund, PCRIX. Here's how it has performed since inception:

Source

Image

It is sometime claimed that commodities can benefit a portfolio by adding diversification. However, this is not automatically true if the return is too low or the correlation isn't low enough. We can explore this by asking PortfolioVisualizer for the optimum amount of PCRIX to add to the Vanguard LifeStrategy Moderate fund, VSMGX We start with a portfolio of 80% VSMGX, 20% PCRIX. PortfolioVisualizer tells us that the optimum portfolio of these two assets is 100% VSMGX, 0% PCRIX, and that the initial portfolio with PCRIX in it actually had both lower return and higher volatility than the portfolio without it. See analysis.
Last edited by nisiprius on Sat May 23, 2020 8:31 pm, edited 1 time in total.
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Re: Do you hold commodities?

Post by nisiprius » Sat May 23, 2020 8:07 pm

Since you mention oil specifically, you should know, if you don't already, how squirrelly commodity futures exchange-traded products can be.

In 2006 or so, the financial press was carrying favorable stories about "innovative" new ETFs, USO and OIL, that would for the first time allow retail investors to gain exposure to... oil, or rather, oil futures. A lot of small investors thought it sounded good.

Amber Waves of Pain
it was early 2009, and Wolf was watching oil fall to $34 a barrel. That had to be an opportunity, he figured, so he called his Merrill broker and asked about the U.S. Oil Fund (USO), an ETF designed to track the price of light, sweet crude. "This seems to be something good," Wolf told the broker, and had him buy about $10,000 of USO.

What happened next didn't make sense. Wolf watched oil go up as predicted, yet USO kept going down. In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent. What was going on? Wolf logged on to Seeking Alpha, a financial blog, and searched for USO. He found plenty of angry discussion about the fund... The commodity ETFs weren't living up to their hype, and the reason had to do with a word Wolf had never heard before. As he browsed the blogs, he says, "I'm seeing people talking about something called contango. Nobody would define it." Wolf called his broker and asked about contango. "I don't know what it is," he replied. He called his other broker, at Charles Schwab (SCHW). "He didn't know either," Wolf says. "He said he'd ask around."
Well, I don't dabble in this sort of thing and I can't tell you, either. I don't need to understand what "contango" is because I know that this kind of investment isn't for me. But if you are going to, then you darn well need to understand it, and understand it well. What I want you to notice in the story is that he expected oil to go up. And oil did go up. Yet the investment that he thought would track the price of oil went down.

USO has proven far more problematical recently when the price of oil actually did go down. If Wolf in fact had hung on to his $10,000 investment it would, today, be worth $893.

I suggest you read recent financial news releases about USO and other similar products, for example this article in the Financial Times (no-cost registration possibly required): Uncleared and present danger. I do not understand this article. But it is enough to convince me that products of this kind are not for me.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Do you hold commodities?

Post by nisiprius » Sat May 23, 2020 8:27 pm

As for VCMDX, I assume you have noticed that Vanguard demands a minimum investment of $50,000 for this fund, and classifies it into their highest risk category, 5.
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Re: Do you hold commodities?

Post by pennsylvania211 » Sat May 23, 2020 9:10 pm

There's benefit of diversification that commodities can provide. I don't dispute that.

But is it unreasonable to say that the return on commodities is "speculative" return?

Aren't lottery tickets also in the category of speculative return?

:confused
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Re: Do you hold commodities?

Post by Dominic » Sat May 23, 2020 9:59 pm

pennsylvania211 wrote:
Sat May 23, 2020 9:10 pm
There's benefit of diversification that commodities can provide. I don't dispute that.

QBut is it unreasonable to say that the return on commodities is "sapaeaaaaecawaaulative" return?

Aren't lottery tirckets also in the category of speculative return?

:confused
Under normal circumstances, there should be a yield on rolling commodities. Longer-dated commodities futures should be cheaper than nearer-dated futures (this is what backwardation is). As you hold them, the value rises. Part of this yield is the risk-free rate, plus there's an insurance premium that producers pay the market to lock in a price.

The return has been fairly persistent over the history of commodities trading according academic research. Supposedly, the markets haven't changed composition much (i.e. the percentage of "actual" hedgers is still about the same).

That said, something has been really weird lately. A lot of commodities, and especially oil/gas, are more expensive on the far end of the curve and they lose value with time (this is contango). You're essentially paying to hold commodities. It's like a negative yield bond, except it's way more risky than a Swiss or German or Japanese bond. The only way to generate a nominal return is for prices to rise (much like the only way to generate a nominal return on negative yield bonds is for yields to fall further).

Unless you're explicitly hedging against a price increase (or the risk free rate is far more negative than the roll yield), I don't think owning commodities in contango makes sense. Airlines should continue to own oil futures, for instance, since their business depends heavily on fuel. The combination of negative expected return with high risk makes commodities a hard sell for me, even if correlations are low.

Something isn't right in commodities markets, and I wouldn't invest until that something is identified and resolved.

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Re: Do you hold commodities?

Post by Harry Livermore » Sun May 24, 2020 6:53 am

I speculate a bit on PMs, particularly silver. I buy SLV on the dips, and pay attention to the silver/ gold ratio to gauge silver's relative value. It has been profitable, but will in no way enhance or endanger our ability to retire or enjoy life. It's currently 0.23% of our portfolio. SLV seems to track the spot price reasonably well. I "trade" it, but over longer periods than commodity folks seem to embrace.
I also buy silver coins (but I am a coin nerd) particularly Silver Eagles; but also silver rounds which are closer to spot price. I have also bought "junk" pre-1965 coins in the past, but those are fully valued (expensive) today, so not buying them.
I have speculated in the past with natural gas, uranium, and copper, all through various ETFs, all with mixed results. UNG (nat gas) was a disaster; even though the price of gas spiked at one point, I had already lost enough $$$ through contango that I realized I'd never break even. The freedom of not waiting until April for that stupid K-1 in order to file taxes was a bonus. I did OK with URA and made pretty good money with COPX. The only commodity I can seem to wrap my head around are the PMs.
It's not for everyone.
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Re: Do you hold commodities?

Post by Anon9001 » Sun May 24, 2020 7:27 am

I hold a Gold Bond (tracks the price of Gold) which pays interest. It is backed by Government and capital gains are tax exempt at maturity. I do not hold other commodities. I also have 1% of my assets in Physical Gold.

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Re: Do you hold commodities?

Post by heyyou » Sun May 24, 2020 9:09 am

Here at BHs, when the major advocate of owning PCRIX at a noticeable fraction of portfolio, stopped talking about it, that should have been interpreted as a sell signal, which I fully missed.

A financial advisor who only accepts clients with mid-7 figure portfolios, publicly admitting a mistake here, is not to be expected. My loss was not large in retrospect, but it occurred about a year after my retiring early. Yes, I've paid for my education about a commodities futures fund, so now it is someone else's turn to repeat my lesson. You will make a little money for awhile, but then the much larger loss will suddenly occur with no recovery and continuing expenses. It costs as much to operate the commodities fund at a loss, as it did before the loss, so the bleeding will continue, just more slowly.

PCRIX most certainly did diversify portions of my portfolio gains, with its losses.
Last edited by heyyou on Sun May 24, 2020 9:18 am, edited 1 time in total.

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Re: Do you hold commodities?

Post by afan » Sun May 24, 2020 9:15 am

There are two classes of people who hold commodities.
Those with a rational reason have their financial futures affected by the prices of at least some commodities. If you work in oil exploration, then your livelihood depends in part on oil prices. You are already in the commodities markets and the only question is whether you can control your risk using futures. Many people are in this situation. Farmers are exposed to commodities prices of the crops they grow. Jewelers are exposed to the prices of precious metals. Banks that lend money to businesses that are affected by commodities prices are exposed to the market.

For everyone else putting money into commodities is a matter of speculation.

I don't have a business reason to own commodities and I don't speculate. So I hold no commodities.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Do you hold commodities?

Post by afan » Sun May 24, 2020 9:22 am

heyyou wrote:
Sun May 24, 2020 9:09 am
Here at BHs, when the major advocate of owning PCRIX at a noticeable fraction of portfolio, stopped talking about it, that should have been interpreted as a sell signal, which I fully missed.

It was not a sell signal. It got to the point that advocating commodities was destroying credibility, so he stopped talking about them. He never announced that one should stop using these funds.

Unless one is in the strange situation of being broadly exposed to many different commodities through work, there is no reason to invest in the broad commodities funds. If one has a narrow exposure to a specific commodity then one might use futures to control that risk. It is unlikely that even a fund focused on that commodity would pair up properly with one's exposure. The only way to do that is probably to roll your own mix of commodity investments.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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Re: Do you hold commodities?

Post by Kenkat » Sun May 24, 2020 9:29 am

Only a fool would hold commodities.

Now that we’ve gotten that out of the way, this fool has had a small percentage of my portfolio invested in commodities since 2004; I’m going to hold onto it but I have ceased rebalancing into it at this point after dumping money into the black hole a couple of times after the initial investment.

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Re: Do you hold commodities?

Post by Silence Dogood » Sun May 24, 2020 9:34 am

OP,

For me, it is simple.

I don't invest in things I don't understand.

I don't understand commodities as an investment.

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Re: Do you hold commodities?

Post by ruralavalon » Sun May 24, 2020 9:50 am

No, I don't invest in commodities. I have no need to hedge against price changes in corn, soybeans, hogs or any other commodity.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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Re: Do you hold commodities?

Post by PurpleArc » Sun May 24, 2020 11:28 pm

nisiprius wrote:
Sat May 23, 2020 8:27 pm
As for VCMDX, I assume you have noticed that Vanguard demands a minimum investment of $50,000 for this fund, and classifies it into their highest risk category, 5.
Yes, I am aware of that.

I also realized that since it is not ETF, I cannot subscribe it through my regular brokerage, which what I was planning to.

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Re: Do you hold commodities?

Post by IndexCore » Mon May 25, 2020 1:44 am

nisiprius wrote:
Sat May 23, 2020 7:59 pm
In the 2008 time frame, one of the most commonly mentioned and often praised commodities funds was the PIMCO CommodityRealReturn Strategy Fund, PCRIX. Here's how it has performed since inception:
I plugged in that fund (PCRIX) and total stock market (VTI) to compare each year. PCRIX's two best years were 2005 and 2009, where it beat VTI by +14% and +19%. But then you have years like 2013-2015, where VTI pulled ahead by +48%, +31%, +25% (OW, ow, ow). In just 2019 and 2020, VTI pulled ahead by +18% and +17%.

Although it's worth mentioning PCRIX's expense ratio (1.46%), the best summary of what happened comes from the Portfolio Visualizer description of the "max drawdown" and recovery:
VTI: Nov 2007 - Feb 2009 max drawdown, recovery by March 2012
PCRIX: Mar 2008 - Mar 2020 max drawdown, ... no recovery listed.

For comparison to gold, using GLD for it's long history (note SGOL has a lower expense ratio of 0.17%)... the best years for a gold ETF were 2007-2008, with GLD beating VTI by +25% and +42%. Gold had a terrible 2013 (VTI did +68% better), but the entire 2013-2015 wasn't as bad (+68%, +15%, +10%) a beating. Finally, rather than losing in 2019-2020, gold did fine: -13% in 2019, and +22% in 2020 (so far).

I imagine at some future point oil prices will rocket back to prior levels, all of this will get flipped around again.

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Re: Do you hold commodities?

Post by IndexCore » Mon May 25, 2020 2:10 am

Portfolio visualizer goes back to 1987 for performance of US stocks, Bond market, and gold. But 1987-1992 favors one asset or the other, so I start measuring a "tie" year of 1993, ending in 2019. Over that period, bonds and gold both beat inflation... but gold had the volatility of US stocks. On a risk adjusted basis, gold is worse than bonds. US stocks performed better than both.

Before this year, gold has never been part of my portfolio. I've considered it numerous times for it's low correlation to both stocks and bonds, and that's why I added a small allocation to gold recently. Gold provides no ownership in a company, nor interest payments. Then again, bonds aren't providing much in the way of interest payments, which was part of the reason gold looked better to me: bonds seem poised to lose against inflation, while gold might keep up.

Just to annoy both sides, I disagree with claims gold beats stocks. It usually involves specific start and end dates. Often, goldbugs include 1972-1974 when the U.S. left the gold standard. Gold averaged +62% a year for those 3 years, but the U.S. can't leave the gold standard twice - those years can't repeat. So I exclude those early years, and view gold as something that might beat inflation by +1%.

Just to reveal my strongest personal bias: I'm overly afraid of capital losses from bond funds. If stocks drop -30%, that's fine, but when bonds drop -10% I'm much more concerned. With bonds at historic low rates, I'm overly worried that when interest rates go up, bonds will get hit with capital losses. That excessive worry is part of why I made a small allocation to gold.

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Re: Do you hold commodities?

Post by nedsaid » Mon May 25, 2020 10:35 am

I do not. I have however owned natural resource stocks that produce commodities like oil and forest products. Once owned Amax, the mining company. Owning the stocks was quite profitable for me, particularly in forest products. Not sure even this is a good strategy anymore.

Had a good conversation with a family member recently. The family member was quite excited about the stock market, it had fallen enough that lots of stocks appeared cheap. He specifically mentioned oil stocks. I told him that oil used to be an easy bet to make, buy the stocks when cheap and you will always make money, that was true 30-40 years ago but probably not today. Pretty much increased environmental risks from deep water drilling and exploration in remote areas. Fracking may have put a permanent ceiling on oil prices. Also the economy is trying to diversify away from fossil fuels. A big bet on oil stocks here has more risk than before and one I am increasingly unwilling to make.

Also had a discussion about Value investing, which tends to congregate in certain sectors like finance and energy. Pretty good arguments can be made that Value is the past and Growth is the future. Lots of folks in denial about the increasing importance of technology. The high tech/internet stocks were a refuge during the Coronavirus storm and not a speculative bubble. Things have changed.

Larry Swedroe often writes about the financialization of the commodities markets. Lots of institutional money poured in and as usual retail investors were late to the party. All that money distorted the markets. For one thing, a big difference between commodities and the commodity futures. You used to be able to get stock market like returns from Collateralized Commodity Futures until all that institutional money rolled in. As far as the commodities themselves, are you going to continually monitor such things as weather reports? As they say, this is above my pay grade. A mere amateur like me isn't going to beat those who do this for a living. Also retail products tend to be late to the party.

So not sure I would even take the indirect approach of investing in the stocks of the companies that produce commodities. I still own Exxon/Mobil and Weyerhauser my Timber REIT. But I am not doubling down on these bets, just keeping what I have and going with the flow of the markets. What worked for me in the past is a path that I am not recommending to newer investors including one of my family members.

Pretty much told him to make the broad index funds the base for his investments. Okay to explore a bit and make speculative plays but don't overdo it.
A fool and his money are good for business.

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Re: Do you hold commodities?

Post by theorist » Mon May 25, 2020 2:32 pm

Something that I found surprising:

Buffett and Munger are famous for their quotes mocking people who hold gold. But there is a well known episode in Berkshire Hathaway history where they made a huge play in the silver market (admittedly in 1997, when they were still young men at 66 and 73 years of age). If you google “Buffet and Munger silver,” you can find articles describing their cornering of a portion of the silver market in ‘97 and the apparently large profit they made off of it some years later.

Of course none of us is going to corner anything by purchasing GLD shares and I am still very suspicious of commodities.

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Re: Do you hold commodities?

Post by Elysium » Mon May 25, 2020 3:06 pm

Some members here were fooled by some very persuasive and persistent arguments made in favor of one of the funds mentioned, PCRIX (Pimco Commodities Real Return). The promise was that this fund will have "double" source of returns, first from the Commodity futures roll returns which were to be in "backwardation", and the second source of return from the collateral for hedging which were TIPS at first, then T-Bills. They were also having low correlation to Equities and Bonds. So, double returns from rolls + collateral, and low correlation to stocks and bonds. There is also the feeling of being superior to other investors since you are investing something that has things called "backwardation" and "contango" which makes you sound super secret smart. Unfortunately, this was one of the biggest snake oil sales pitch in the history of the forum. No other asset has performed so poorly in this history of this forum, that was marketed with so much fervor. The next closest thing is the AQR Style/Risk Premia funds.

Say no to commodities, they don't produce anything, they don't have earnings, dividends, or pay you interest. They are useful for people who wish to hedge their future commodity spending needs, so if you are a baker then makes sense for you to get into a futures contract to buy grains at a given price, or if you wish to purchase oil futures for a given price as operator of a manufacturing plant, or a Jeweler who wish to guarantees Gold purchase at a given price and can set their selling price, make estimates on profit margins, operating cost, etc. Individual investors aren't going to benefit from these things.

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Re: Do you hold commodities?

Post by ginrummy » Mon May 25, 2020 3:41 pm

PurpleArc wrote:
Sat May 23, 2020 7:35 pm
Thanks to Ray Dalio, I've started thinking about all-weather, and one of the assets class that intrigued me, from Ray and Jim Roggers' books is that commodities (grains, softs, livestocks notably) are much more real than others such as stocks. In good times and bad times people always need to eat.

1) Are you guys going into commodities and your take on the new VCMDX.

2) Oil which is part of energy commodities, I am short term bullish (V shape) but long term bear (renewables, fracking breaking OPEC monopoly). Energy/oil gets lump into VCMDX as other more "real" commodities like grains and livestocks, fairly so since they are both commodities, but do you think it should be viewed seperately?
I’ve invested my IRA into Dalio’s all weather. As far as the commodities holding, it’s the dog of the bunch but, funny enough, I don’t totally hate it. I’ve only been in this portfolio since August of last year. So nearly a year. Commodities has taken a huge hit without the recovery of stocks but because the portfolio is set to what I understand is a risky parity tilt, I’m okay with it. Weird. But if I had commodities by itself, just laying around without any correlation to the other holdings, I’d be more upset. This is my take on commodities. They make sense in a portfolio that is balanced to handle volatility but having them alone just as a percentage of the allocation...well, I think they would be hard to hold. I would have tossed them overboard by now.

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Re: Do you hold commodities?

Post by retired@50 » Mon May 25, 2020 3:46 pm

I don't invest in commodities.

In all the reading I've done, it seems as though you have to buy and sell at the right time, otherwise you just earn the T-bill yield.

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Re: Do you hold commodities?

Post by billthecat » Mon May 25, 2020 8:15 pm

I don’t now but at one time I had some money in a range of commodity ETFs.

Of course, I started out with a lot of money in commodities... :oops:
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phatpodo
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Re: Do you hold commodities?

Post by phatpodo » Mon May 25, 2020 8:29 pm

I just don't see the need to have commodities.

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Re: Do you hold commodities?

Post by Rosencrantz1 » Mon May 25, 2020 9:29 pm

A 'goldbug' friend of mine convinced me to buy some gold years back. Ended up with some American gold eagles collecting dust. I actually keep them around - but, I suspect IF I were to ever need them, ammo, food, and medicine will be more valuable. Still... at current prices, they're worth more than I paid for them - so, at least there's that.

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Re: Do you hold commodities?

Post by firebirdparts » Mon May 25, 2020 9:53 pm

Gold is a whole lot different from the useful commodities. One of the sure signs of progress in technology is that commodities are getting cheaper. Gold has resisted that.
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