Gold has long been seen as "real money". It is seen as a stable store of value, and today, it is seen a "must have" alternative investment for any diversified portfolio. Indeed, gold's popularity is demonstrated by the fact that the SPDR Gold Trust (GLD) has already gathered approximately US$75 billion of assets.
We believe, however, that those looking for "hard asset" alternative investments are making a mistake by limiting themselves to gold alone, and would be well served by also considering such assets as agricultural land and forestry as well.
The major reasons to consider other hard assets as an alternative to gold are as follows:
1) Gold pays no income, whilst the other hard assets mentioned frequently pay very healthy dividend income yield. For example, through the right investment structure, such as direct ownership of farmland on the agriculture side, an investor can obtain a healthy chunk of yearly income ranging anywhere from four or five per cent to 10% or more, depending on where they invest. In a world in which major western central banks are committed to keeping interest rates at or near the zero-bound for the foreseeable future, this is nothing to sneeze at.
2) Gold is largely an economically unproductive asset, rendering it essentially a faith-based investment. The other hard assets mentioned above, however, represent activities of genuine economic value. For example, consider agricultural land. To state the obvious, farmland produces food, the production of which is - again to state the obvious - necessary for basic human existence. To take another example, bamboo forestry investments allow access to a market that is expected to double in size from US$10 billion to US$20 billion by 2015, as bamboo is increasingly used in everything from flooring to furniture to toys. Gold's value, by contrast, is largely based upon the agreement that it is a form of money, rather than its inherent economic utility. Consider this: If, for the sake of argument, people suddenly decided that gold was not really an alternative source of money, the pretty shiny metal you would be left with would largely have no inherent economic value the way hard assets such as agriculture or forestry would.
3) Finally, we would also argue that if one is holding gold largely as a hedge against inflation, other hard assets offer the same benefits as gold without gold's disadvantages noted above. For example, as this article last year from Money Morning notes, timber investments offer fantastic real rates of return, particularly during periods of high inflation. Taking the United States as an example, during America's last major inflationary period from 1973 to 1981 when inflation averaged 9.2% per annum, timberland values increased by an average of 22% per year. Similar statistics would hold true for the UK and other western countries.
Just to be clear, we are not dismissing gold, but merely suggesting that you consider supplementing your real asset "basket" with other asset classes in addition to gold. Here are some basic ways in which an investor could play the themes noted above:
Agricultural Land Whilst direct investing in farmland - as we noted in a previous article - is increasingly possible even for small investors, it is also quite possible to purchase farmland by buying farmland stocks from your trading account. The leading option here is Cresud (CRESY). Cresud directly owns nearly 500,000 hectares of rich farmland in Argentina and the foodstuffs it produces run the gamut from soybeans to cattle. It is literally about the closest you can get to actually owning farmland through an online brokerage account. Whilst it is legitimate to raise concern about the attractiveness of Argentina as a destination for investment, Cresud has thrived for 75 years in that country and is well ensconced. The management of Cresud owns a substantial stake in the company, and it pays a 3.5% dividend yield as well.
Timber and Forestry Timber has long been an asset class that has been owned by institutional investors such as the Harvard University Endowment. As with farmland, however, opportunities for retail investors to actually own timber and forestry assets directly now exist as well. For those who prefer to stick to using a brokerage account to own timber, the best option here is the US REIT Plum Creek Timber (PCL). Plum Creek is, believe it or not, the largest private land owner in the United States, owning approximately 6.6 million acres of land. Plum Creek derives its revenue from the sale and management of timber lands. The company also earns money from selling leasing rights for oil, gas and mineral extraction on the land it owns. Plum Creek currently yields just a shade under 4%.
So by all means hold some gold or other precious metals if you want to hedge against inflation, but it is also worth considering more economically productive real asset investments as well.