I’ve spent my entire life pointing out potential risks: in our economy, in our housing market, and in our stock market. Too often, we only pay attention to the safety of our assets while taking unnecessary risks.
But sometimes you also have to consider the other side of the risk / reward coin. Every asset has a buyer, if the price is low enough.
And I think that’s where the market is with a huge swath of commodities these days.
It’s about risk / reward.
Real estate prices are through the roof. Even insiders at the Federal Reserve say there is a bubble in commercial properties. And you’ve heard a lot from us and others about concerns in the stock market.
When it comes to risk versus reward in those two sectors, well … the “reward” part, after more than six years of profit, is almost as spent as a bottle of champagne on the morning after New Years.
The case of raw materials
Commodities are the other side of the asset coin. Sure, oil prices have doubled since the beginning of the year and precious metal prices are up around 20%, but neither is anywhere near their highs of a few years ago. The rest of the raw materials complex represents a similar mix of results in 2016:
-
Copper: + 1%
-
Soy: + 8%
-
Wheat: -15%
-
Corn: -8%
-
Sugar: + 50%
-
Nickel: + 20%
And take a look at just about any commodity tracking price index or exchange-traded fund, and you’ll see what I’m talking about. For example, the Dow Jones Commodity Index is up just 23% since bottoming out earlier this year (mainly due to rising energy prices). But it’s down more than 30% since 2014.
It may seem strange to point to an underperforming asset class and say “put some money in there”, but that is exactly why the commodities sector is worth looking at right now.
It offers the opportunity to diversify a part of your assets in stocks and properties. And best of all, commodities are uncorrelated, which means they don’t keep pace with the same drummer, going up and down with price, like stocks and real estate.
But there is another way to think about all this. For example, the change of house and intraday trading are back in fashion. But say, “I like corn. It’s at its cheapest price in a decade,” and all you’ll hear are sounds of silence (and maybe crickets).
However, there is a flip side to the old adage that “the best cure for high prices is high prices.” What’s the best cure for low prices across the commodity complex? Yes, low prices. And it’s leading growers, miners, and other producers to scale back while they wait for demand to reappear.
For example, Texas farmers are on track to plant up to 20% less wheat this fall (after reducing planting by 13% in the same period last year).
When it comes to risk versus reward, you can’t find an asset class that your neighbors and cocktail friends are more indifferent to than commodities. That is good. When an asset is unpopular, even hated, it means there is potential for profit. The same cannot be said broadly about stocks and real estate at current levels.