Get rich with gold and oil?

During the global economic expansion of the
mid-2000s, precious metals (such as gold), oil,
and other commodities increased significantly
in value. The surge in oil prices certainly garnered plenty of headlines when it surged past
$100 per barrel. So, too, did the price of gold as
it surged past $1,000 per ounce in 2008, setting
a new all-time high. These prices represented
tremendous increases over the past decade
with the price of oil having increased more than
600 percent (from less than $20 per barrel) and
gold more than tripling in value (from less than
$300 per ounce).
However, despite these seemingly major
moves, when considering the increases in the
cost of living, at $100-plus per barrel, oil prices
were just reaching the levels attained in late
1979! And even with gold hitting about $1,500
per ounce in 2011 as this book went to press, it
was still far from the inflation-adjusted levels it

reached nearly three decades earlier. To reach
those levels, gold would have to rise to more
than $2,000 an ounce!
So although the price increases in gold and
oil (as well as some other commodities) were
dramatic during the past decade, over the past
30 years, oil and gold increased in value less
than the overall low rate of U.S. inflation. So one
would hardly have gotten rich investing in oil
and gold over the long-term — rather it would
have been more like treading water.
I’d like to make one final and important point
here: Over the long-term, investing in a stock
mutual fund that focuses on companies
involved with precious metals (see Chapter 8)
has provided far superior returns compared
with investing in gold, silver, or other commodities directly.

The only real use that you may (if ever) have for these derivatives (so called
because their value is “derived” from the price of other securities) is to hedge.
Suppose you hold a lot of a stock that has greatly appreciated, and you don’t
want to sell now because of the tax bite. Perhaps you want to postpone selling
the stock until next year because you plan on not working, or you can then
benefit from a lower tax rate. You can buy what’s called a put option, which
increases in value when a stock’s price falls (because the put option grants its
seller the right to sell his stock to the purchaser of the put option at a preset
stock price). Thus, if the stock price does fall, the rising put option value offsets some of your losses on the stock you still hold. Using put options allows
you to postpone selling your stock without exposing yourself to the risk of a
falling stock price.