Oil, Not Gold? Better Yet, A Basket of Dividend Paying Stocks?

In a time of anticipated inflation, real assets (commodities and real estate) tend to be more attractive than financial assets (e.g. stocks and bonds).

Thus the interest in precious metals such as gold these last few years.

I hope I am wrong, but the huge run up in gold (22.1% just this year so far!) and silver (40.1%) looks and talks like a bubble.

Many people have rushed into precious metals (gold and silver) for various reasons, but the common themes are the same as they have been through time immemorial: They are seen as  1) a hedge against inflation or 2) a hedge against a systemic breakdown in currency valuations.

It’s easier now to buy gold than in the past.  Between ETFs such as the SPDR Gold Shares (symbol: GLD) and having access to direct sources on the internet, it’s become more accessible. There are more options on how to buy it.

Yet precious metals (e.g. gold or silver) have no intrinsic value.  They don’t pay a dividend.  They don’t represent any value beyond what current buyers value it at.

Another concern? Precious metals are taxed as a collectible, not a security (e.g. stocks and bonds).  A higher tax rate applies:  28% vs. the 15% of long term capital gains.  This is because the IRS categorizes collectibles differently than securities.

Gains realized when you sell precious metals will be at the collectibles rate of 28% vs. the 15% long term capital gains rate that applies when selling securities.

This is almost double the rate of the tax you would owe if you were instead selling securities (assuming they were held longer than a year).

Also just like any other investment, precious metals, specifically gold, can be taken too far.  It can start to represent too big of  a piece of an investor’s asset allocation.

So what is an investor who anticipates inflation and seeks diversification to do?

While I agree that real assets play a bigger role during anticipated inflationary times than securities (stocks and bonds), there are other real assets, such as oil, to consider.

Oil has been pushed to the backburner in the last couple of years, but nothing has fundamentally changed with respect to oil, and it already had it’s bubble a few years back and has stabilized since then.

Also, people use oil. People do not use gold. Sure it’s used as jewelry, but it’s flat consumption, with the exception of India and China consumer use, which, while growing, is not anticipated to absorb all the run up in value of these last few years.

What other choices exist besides precious metals and other real assets (e.g. real estate)?

A basket of dividend paying stocks.

A basket of dividend paying stocks with companies in uncorrelated industries can be more diversified vs. investing in one asset class (precious metals), let alone one asset (gold).

Also, it is more liquid than alot of real assets and the 15% tax rate applies vs. the 28% tax rate (assuming your holding period is > 1 year).

Any sort of decision on how to hedge anticipated inflation needs to take into consideration the larger picture of the investor’s objectives, but in general the same rules about diversification, liquidity, and risk still apply.

(Disclosure: I am a Fee-Only Financial Planner. Here’s my website.)