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Tangibles

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Gary Karz, CFA (email)
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Principal, Proficient Investment Management, LLC

Background

     Tangible is a term used to refer to assets that have some function. Gold, platinum, silver, commodities, gems, and art are typically classified as tangibles (others include coins, stamps, books, antiques, furniture, rugs, "Chinese ceramics" and other collectibles). ETF's have made investing in many tangibles easier, but historically tangibles were differentiated from other investment classes by limited marketability, high maintenance, and high information costs.

     Gold has historically been a store of value and was commonly used as currency. The reason not to invest in gold is that over long periods of time it has had real returns near zero. In other words, investing in gold has returned the equivalent of inflation (Source: Stocks for the Long Run by Jeremy J. Siegel). Other negatives include the costs of acquisition, storage and insurance which may result in negative real returns. Additionally, the price fluctuates exposing the investor to risk. In contrast, an investor in T-Bills or CD's has an advantage over gold investors in that they have virtually no volatility. See also Gold Canít Beat Checking Accounts 30 Years After Peak from Bloomberg (12/7/2009) and Gold Isn't Worth Its Weight In Gold in Business Week (7/21/97).

     Arguments that can be made for investing (as opposed to speculating) in gold and similar commodities include diversification (although other assets offer the same diversification benefits with higher returns), maintaining a portfolio in proportion to current world wealth (gold historically tends to be about 3% of the worlds wealth), and insurance against catastrophes. In Can Precious Metals Make Your Portfolio Shine? (2009), the authors argue that adding them to your portfolio did increase return and reduce risk over a 34 year period. That followed Do Precious Metals Shine? (2006) in the Financial Analysts Journal. See also Is There a Role for Commodities in Long-Term Wealth Accumulation? by Nigel D. Lewis in The Journal of Wealth Management (Fall 2009) and The Case for Commodities (12/28/09) in Businessweek.

     Investors should be careful not to confuse investment with consumption when evaluating tangibles. Lack of liquidity and high volatility place nonspecialized investors at a disadvantage. Additionally, most tangibles do not pay dividends or have any kind of income. (Aesthetic pleasure is art's dividend.) Many advisors recommend purchasing tangibles for pleasure, not for investing purposes.

     The 11/30/96 issue of the Economist (page 76) included an interesting article on the art market titled Has Wall Street's buying fever infected the art world? The following are some excerpts from the article. "The art market experienced a surge in the late 80's as a bubble in Japanese stocks and property prices suddenly brought Japanese buyers to auction rooms around the world ... But when the property bubble burst in 1991, the air rushed out of art values as well. International art prices fell by 40% that same year, according to Art Market Research, a British consultancy ... while precious art may be a fun way to spend your wealth, it is not necessarily a smart way to invest it. For a start, the financial gains that art generates are very different from those of a stock or a bond. Paintings do not pay dividends. And if you need to raise a little cash, it is difficult to liquidate a sculpture one limb at a time ... a work of art can not be priced with financial formulas. It is ultimately worth only what some other collector is willing to pay. To shell out millions now, in the hope that someone else will shell out even more in the future, is risky indeed."

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