Not Digging It

John Goodell

BEFORE I BECAME a devotee of index funds, I began my investing journey in commodities, with a focus on commodity miners and producers. These firms extract a variety of goods from the earth, including precious metals like gold and silver, as well as energy-related commodities like oil, natural gas and uranium.

As a college student first studying the markets, I was drawn to the outsized returns that can occur in a commodity bull market. The cyclical nature of commodity super-cycles means their profits are epic—and so are the bankruptcies. In the end, I abandoned investing in commodities after a decade of unspectacular results.

Here are the five reasons I avoid the sector entirely:

  1. Commodity miners often engage in price-fixing that hurts consumers and destroys smaller competitors. When a few large producers dominate a market, they may act as a cartel to affect both supply and prices.
  2. Mining certain commodities, like uranium, can cause health problems to miners, most of whom are poor and desperately need the work to support their families. I discovered this when I recently read Max Chafkin’s biography of tech billionaire Peter Thiel. Thiel’s father worked as a uranium mining engineer in apartheid South Africa when Thiel was a boy. Black laborers reportedly were never told they were mining uranium. One advocacy group reported that workers were “dying like flies” from radiation. There are many such examples of indifference to miners’ health and safety, including a depressingly large number of coal mine disasters in West Virginia.
  3. Outside of Australia, the U.S. and Canada, nearly every commodity-rich nation is a human rights abuser. Look no further than the deplorable Russian actions in Ukraine, which are enabled, in part, by blood money paid for Russian oil and gas. Companies—and, by proxy, their investors—are, at best, forced to hold their noses at such gross misconduct and, at worst, seem complicit in criminal behavior.
  4. Many countries in the Middle East and Latin America have enacted laws that rob shareholders of their equity in commodity companies. In Russia, commodity-producing assets have been stolen twice. The first time was during the Communist Revolution in 1917. Then, almost from the moment the Soviet Union fell in 1991, Vladimir Putin, his oligarchs and the Russian government stole private investments in oil and natural gas companies again.
  5. Even when the best-run companies in Western-style democracies succeed in extracting commodities, the supply left in the ground drops. Unless new proven discoveries come on line to replace the diminishing reserves, their business success is finite. Investors with long-term horizons are betting that these firms will find quality replacements by discovery or acquisition, but this is anything but guaranteed.

Do my broadly diversified index funds own small percentages of commodity producers? Sure. But I’m comforted that these percentages have shrunk in recent years, and I hope they will continue to do so. I’m optimistic this trend will continue because I believe in the words of Dr. Martin Luther King Jr., who said, “The arc of the moral universe is long but it bends toward justice.”

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