Are Commodities the Next Bubble?

Investing Expert Warns: Beware the Hype

Are commodities king? It certainly seems so these days with so much talk about inflation rearing its ugly head.

With oil hitting record levels almost every day, the US Labor Department saying we're seeing the fastest rate of food price increases in 18 years, and the price of gold piercing $1,000 (a new record) earlier this year, physician-investors might be poised to jump into commodities to make some fast money. Adding fuel to the fire is the flock of “experts” saying you can't go wrong with commodities.

“What we're seeing is a prime example of the herd mentality,” notes Eric Tyson, MBA, author of he best-sellers, Investing For Dummies, Mutual Funds For Dummies, and Personal Finance For Dummies. “Getting rich with commodities seems so easy. But when you really look at the numbers through the cool lens of logic, you'll see that the outlook for some commodities isn't all that great.”

Too Much Hype

Take oil, for example. Despite the seemingly major moves in its price, when considering the increases in the cost of living, at $100 per barrel earlier this year, oil prices were just reaching the levels attained in late 1979. So, although the price increase in oil was dramatic during recent years, over the past 30 years, oil increased in value at about the rate of US inflation.

Another potentially over-hyped investment right now? Precious metals like gold and silver. When gold hit a new high earlier in 2008, novice speculators couldn't get their hands on it fast enough. And while it's widely recognized that precious metals perform well during bouts of inflation—in the double-digit inflation years from 1972 to 1980, the price of gold, adjusted for inflation, reached $2,000+ an ounce—Tyson says the recent surging in prices seems to be driven by the global economic boom, not inflation.

“Over the long term, precious metals are lousy investments,” he says. “They don't pay dividends, and their price increases at best may just keep up with, but not ahead of, increases in the cost of living. Although investing in precious metals is better than keeping cash in a piggy bank or stuffing it in a mattress, the investment returns aren't nearly as good as bonds, stocks, and real estate.”

Can’t Keep Up

So why are commodities poor long-term investments compared to the classics (bonds, stocks, real estate)? Quite simply, it's because they don't increase as steadily over the long term as these other investments. High commodities prices put such financial strain on consumers and businesses that they can't be sustained by the market. As a result, people and businesses find ways around using so much of really high cost commodities.

“Just think about how these high commodities prices are affecting your day-to-day life,” says Tyson. “Most of us can't get through a day without complaining about the high prices we are paying at the pump and at the grocery store. Eventually the demand for the most costly commodities will decrease because fewer and fewer of us can afford them. When that happens, the prices will start to come down.”

If commodities aren't the way to go, where should you invest your money? Tyson says ownership investments will provide you with the biggest returns over the long term.

“Ownership investments include stocks, real estate, and small business,” says Tyson. “If you understand and are comfortable with the risks and take sensible steps to diversify, such investments are the key to building wealth. Their values will increase over time and will set you up nicely for your retirement.

"All of the hype that is surrounding the commodities market right now is just that," concludes Tyson. "Don't get caught up in it. Folks just getting in now will most likely be sorry in the future."