I’ve spent a lifetime pointing out potential risks — in our economy, in our real estate market and in our stock market. All too often, we pay only lip service to the safety of our assets while taking unnecessary chances.
But sometimes you have to consider the other side of the risk/reward coin, too. Every asset has a buyer — if the price is low enough.
And I think that’s where the market’s at with a large swath of commodities these days.
As equity long/short hedge funds have struggled this year, managed futures funds have been able to capitalize on market volatility and generate some of the best returns in the hedge fund industry. The managed futures sector refers to funds known as commodity trading advisors, or CTAs, which generally use a proprietary trading system to trade Read More
It’s all about risk/reward.
Real estate prices are sky-high. Even insiders at the Federal Reserve say there’s a bubble in commercial property. And you’ve heard plenty 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’ worth of gains, is about as used up as a champagne bottle on the morning after New Year’s.
The Case for Commodities
Commodities are the other side of the asset coin. Sure, oil prices have doubled since the start of the year, and precious-metal prices are up around 20%, but neither is anywhere near its highs of even a few years ago. The rest of the commodities complex represents a similar mixed bag of results in 2016:
- Copper: +1%
- Soybeans: +8%
- Wheat: -15%
- Corn: -8%
- Sugar: +50%
- Nickel: +20%
And take a look at just about any commodities-tracking price index or exchange-traded fund, and you’ll see what I’m talking about. For instance, the Dow Jones Commodity Index is up only 23% since bottoming earlier this year (primarily due to the rise in energy prices). But it’s down by more than 30% since 2014.
It might seem odd to point to an underperforming asset class and say “put some money there,” but that’s exactly why it’s worth looking at the commodities sector right now.
It offers the chance to diversify a portion of your wealth out of stocks and property. And best of all, commodities aren’t correlated — meaning they don’t march to the same drummer, going up and down lockstep in price — as stocks and real estate are.
But there’s another way to think about all this. For instance, house flipping and day trading are both back in vogue. 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).
Yet there’s a flip side to the old adage that “the best cure for high prices is high prices.” The best cure for low prices across the board in the commodities complex? Yup — low prices. And it’s leading growers, miners and other producers to pare back while waiting for demand to kick in again once again.
For instance, Texas farmers are on track to plant as much as 20% less wheat this fall (after cutting 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-party friends are more indifferent about than commodities. That’s a good thing. When an asset is unpopular, even hated, it means there’s a potential for profit. The same can’t be broadly said about stocks and real estate at current levels.