by Carl Delfeld, Investment U Senior Analyst
Thursday, January 10, 2013: Issue #1945

No question, gold has had a nice run.

It's been up 12 consecutive years. And during this period, gold prices are up around 500%. This is probably why in 2012, 84% of new cash invested in commodities went into gold funds.

But these investors would have done far better if they had invested in another commodity that we use every day. One that beat gold by 567% in 2012.

While gold was up 6.6% last year... Timber was up 37.4%. And timber future prices were up 49%.

I'm not surprised.

I grew up around a lot of trees and vividly remember our annual family camping trips in the northern woods of Wisconsin. It seemed like millions of towering trees ? some more than 200 feet tall ? closed in on us from all sides, for miles on end.

But by a long shot, the best part of these trips were the pancake breakfast specials and all the stories about the lumberjacks and timber barons.

Fortunately, the cut and burn practices of the nineteenth century lumberjacks and timber barons have been replaced by a sophisticated, sustainable and scientific business model.

And this is why timber has proven to be a terrific investment over the years. Looking ahead, Jeremy Grantham's GMO research team ranks timber the No. 1 asset class for expected returns over the next seven years.

Let's look at the long-term record of timber ? and why it is surging right now.
The Price of Lumber Outperforms the S&P 500

The price of lumber during the past century has gone up an average of 5% annually, outperforming the S&P 500, with the added bonus of lower volatility.

Since 1987, the Timberland Index is up nearly 15% per year. That's against an annualized 9.6% return for the S&P 500. Timber also holds up well in bear markets and tough economic conditions. When stocks plummeted during the Great Depression, timber gained 233%. And in 2008, when the S&P 500 lost 38%, the Timberland Index gained 9.5%.

What's driving timber and lumber prices right now?

One reason for this steady growth is that timber prices tend to follow population and economic growth. Emerging market nations like China and South Korea are key drivers of growing demand for lumber products. Another nice aspect of the timber business is, timber owners have the flexibility to slow harvesting rates when prices are weak, and expand as prices rise.

The improved housing outlook and sharp pick up in construction also provide wind at the back of the timber industry.

Supply has been hampered by regulatory burdens. Timber harvesting on public lands in California is down 90%, and 46% of its sawmills have closed since 2000.
Hedging Inflation

Timber also seems to offer a better inflation hedge than gold. Gold, on the other hand, seems to me to be more of a hedge on political or economic instability.

And since timber follows population and economic growth ? plus has practical uses in construction and paper products ? it isn't prone to volatile cycles.

Academic research finds that timberland assets offer an excellent hedge on "higher than anticipated" inflation. This is backed up by timberland values surging an average of 22% a year during 1973 to 1981, when inflation averaged 9%.

No wonder institutional investors have poured over $30 billion into timberland investment management organizations (TIMOs), up from $1 billion in 1989.

So my advice is to sell some gold and add some timber to your global portfolio for 2013.

Good Investing,

Carl

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