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Be Cautious Of Gold, Commodities

|Includes: AUY, Barrick Gold Corporation (GOLD), HSY, KGC
  • Supply and demand determine pricing of commodities, not speculators.
  • Promoters do not know the direction of commodity prices.
  • Average long-term investors are better off investing in stocks, bonds and real estate

A year ago I wrote an article called "Cut Investment Risk: Stay Away From Gold."

Since then gold price has traded down -5.3% to $1,245.00 per ounce on Sept. 11, 2014, from $1,315.54 per ounce on Nov. 4, 2013.

During that same time, the S&P 500 rose 12.68% from 1767.93 on Nov. 4, 2013, to 1992.21 on Sept. 11, 2014.

Barrick Gold (ABX) fell -9% from $18.22 per share to $16.57 per share.

Yamaha Gold (NYSE:AUY) fell -22% from 9.34 to $7.25. Kinross Gold Corp (NYSE:KGC) fell -25% from $4.93 to $3.69.

Gold is considered a hedge against inflation, but inflation is fairly tame right now, and other assets, such as the S&P 500, have provided much higher returns.

Gold advocates will say this is a bottom, but they said that a year ago and got hammered. Picking a bottom in any security is nearly impossible. Good for you if you have done this.

The volatility of gold makes this commodity a trader's play. By selling short or buying long in certain trading patterns, you can make money. But what if the trading patterns defy your model?

You are better off to own companies that use commodities to make money. In other words, own the candy company like Hershey (NYSE:HSY) that buys sugar and cocoa beans to craft them into candy. This is more of a sure thing.

When I was a boy, my grandfather, Thomas Reid Hooper, a businessman who lived through the Great Depression, took me out to coffee with him occasionally. When we walked by the commodity broker's office, grandpa would always say, "stay away from commodities."

My grandfather's advice has served me well. Commodities for investment purposes are a higher-risk play than I'm willing to accept. Money not lost is money ahead.

Disclosure: The author is long HSY.