Commodities: Record Highs or Record Hype?

There's no debating the surging interest in commodity investing. Nor can one argue against the reality that the spot prices on "stuff" have been more profitable than the share prices on company stock.

The media bombard us on a daily basis about the seemingly endless demand for metals, agriculture, livestock, oil and water. Moreover, we frequently hear how supply cannot be increased. (Side Note: Keep in mind, it was only a few years ago when you were reading similar articles about a lack of houses and a lack of quality land to serve an increasing U.S. population.)

Am I suggesting that we're looking at a potential bubble of sorts? Nah... I don't see that at this point in time. I buy the argument that the world needs more "stuff" as emerging "industrializers" join the 21st century.

However, it may be worthwhile to separate some of the fact from fiction. For example, the price of crude oil has closed at a genuine record high yesterday. What do I mean by genuine? I mean that when one adjusts for the purchasing power of the U.S. dollar, $104 per barrel is greater than the record prices of the 80s.

If you believe that this trend will continue, the most popular ETF for oil is the United States Oil Fund (USO). It closed at an all-time peak of 83.3 yesterday.

Whereas oil has reached an inflation-adjusted record, gold is far from that place. Most analysts say that gold would need to hit $2000 per ounce to get to the 1980 top. And gold currently trades at less than $1000 per ounce.

One of the most popular ETFs for gold investing is the Streettracks Gold Trust (GLD). It closed yesterday at a 52-week high of 97.72. But again, if one is inclined to see the precious metal surpass true-and-genuine records, GLD would need to rise another 100%.

Silver has a similar story; that is, we hear all about record silver prices. In nominal terms, that may be true. Inflation-adjusted, however, silver would need to go from its current level of roughly $20 per ounce to the $50 level in 1980.

Can silver catapult another 150%? If you like that possibility, then you might like the iShares Silver Trust (SLV). It finished at a 52-week peak of 206.2 yesterday.

Natural Gas (UNG) is another interesting topic for discussion. It is up 25%+ in 2008, but it is still down 13% from May 2007 and off 20% from December 05.

While one might be inclined to think natural gas should join the commodity rage... it is less likely to occur from a supply and demand standpoint. We're not running out of the stuff.

Personally, I still regard the iPath Dow Jones Total Commodity Index (DJP) as the best path towards profit and portfolio diversification. It is far less speculative and it doesn't correlate with stock assets.