The most hated asset class

I’ve spent my 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 security 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 lot of commodities these days.

It’s all about risk/reward.

Real estate prices are through the roof. Even experts at the Federal Reserve say there is a bubble in commercial property. 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 earnings, is about as worn out as a bottle of champagne the morning after New Year’s.

The case of raw materials

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 the highs of a few years ago. The rest of the commodity 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 almost any commodity tracker price index or exchange-traded fund, and you’ll see what I’m talking about. For example, the Dow Jones Commodities Index is up just 23% since bottoming out earlier this year (mainly due to rising energy prices). But it is 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 commodity sector is worth looking at right now.

It offers the opportunity to diversify a portion of your wealth into stocks and properties. And best of all, commodities are uncorrelated, meaning they don’t march at the same rate, going up and down at the same rate as stocks and real estate.

But there is another way to think about all this. For example, house swapping and intraday trading are back in fashion. But say “I like corn. It’s at its lowest price in a decade,” and all you hear is the sounds of silence (and maybe crickets).

However, the old adage says that “the best cure for high prices is high prices.” The best cure for generally low prices in the commodity complex? Yes, low prices. And it’s leading growers, miners and other producers to cut back while they wait for demand to pick up again.

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’s 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.