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Reasons to (still) think twice on oil and gold

October 23, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Oil and gold are two of the most prominent commodities -- both as visible goods in everyday life and as investments. One other thing they have in common is that both took a bit of a hit from the federal government shutdown. Does that step back in prices make them an attractive investment now?

Here are some points to consider:

Gold

By mid-October, gold prices had fallen nearly $500 an ounce over the past year, to just above $1,250. Like many assets, they got a quick boost from the budget deal, but they remain sharply off their highs. Does that make them a bargain?

Even at today's reduced levels, gold prices have roughly tripled in the past 10 years. That long, speculative surge may have finally broken, and when that happens, investments in gold can represent dead money for a long time.

Because gold can be subject to very long price cycles and does not provide you with any sort of ongoing income, it is not the kind of investment that should be a central part of a portfolio, but it can be used to incrementally add diversification. However, if it is diversification you are after, you may want to invest in a wider range of commodities rather than gold alone.

Oil

After briefly reaching $110 a barrel in mid-September, oil has settled back down to just over $100. A prominent reason for the slide has been concern about the economy, especially given the disruption created by the government shutdown. That shutdown has created a wider climate of uncertainty whose effects could be felt long after government workers are back on the job.

The funny thing about oil is that to some extent, it can benefit from both good and bad news, and that price behavior was on display earlier this year. Oil prices started to rise in the spring when economic optimism was growing, and then continued to rise as tensions in the Middle East heightened supply concerns.

The ability to benefit from certain types of bad news raises one value of investing in oil, and that is as a hedge against inflation. However, if the commodity markets are too exotic or volatile for you, another route would be to invest in stocks of oil producers and exploration companies that benefit from higher oil prices.

Alternative investments in general

Two things help to make the case for alternative investments right now. One is the low level of bank rates and bond yields -- as long as savings account rates are below 1 percent and bond yields not much better, investors are going to be forced to look for more productive places to put their money. This helps explain the other thing that makes commodities look more attractive right now: the fairly improbable run the stock market has had so far this year. It has had a Teflon quality to it -- no bad news seems to stick to the stock market, and that's the kind of environment that should make investors skeptical.

Still, the unattractiveness of savings account rates and stocks does not mean that commodities are the answer. You would be wise to spend some time researching and following those markets thoroughly before taking the plunge -- commodity markets can be expensive places to trade, and the volatility can be extreme.

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