How 'bout them Apples... Or Corn, Cattle, Cotton, Gold, Coffee. Based on my analysis I see commodities markets offering investors above average returns heading into the next decade. During the expansion of our economy from 2008, prices in the commodity market have been fairly low and producing dismal returns. This is ranging from several factors such as energy prices falling, subsidized farming, the price of precious metals collapsing, and even cyclical trends. Which we will cover later... Investing in commodities can be difficult because it covers a range of different industries not just one. Often time commodities are broken down into two groups: Hard Commodities (Gold, Silver, Rubber, Crude oil, etc.) these types of commodities are often mined or extracted from our beautiful earth. Soft commodities on the other hand are usually grown (Coffee, oranges, corn, wheat, sugar. Soybeans, etc.) Because commodities range from different sources it makes capitalizing on the investment tricky due of the prices fluctuation of goods (i.e. sugar may go up while, oil prices decline.)
However, there is one indicator that can help gauge the movement of all commodities classes and that’s inflation. Inflation effects all good that can be purchase on the market, not just one- therefore leading to a rise in commodities as a whole.
As a consumer, who likes inflation? When the price of goods rise it can severely dampen ones pay check. Unless, you shop at Whole Foods then you are screwed at the register before and after inflation. If you’re an investor in commodities on the other hand, rising inflation can be advantageous as one would expect a higher return as the prices of consumer goods rise. Taking a glance at the chart, we can see over the past decade as inflation began its accent from 2008 the rise in the commodity index has done the same. It is also worth noting, this is NOT a default action, but more often than none- throughout history commodity prices have moved well alongside inflation.
Another factor to consider is the current administration’s stance on trade and protectionism. Bringing back jobs from overseas into the United States will definitely increase the prices of goods because of the higher production cost state side. Again- great for commodity investors and producers, bad for the overall economic well-being.
As I mentioned earlier, price cycles can also play a larger role when looking to invest in commodities. Though it is heavily debated on whether cycles hold any merit in commodities-we have seen the price of commodities rise and fall at precise time intervals. Through my research I've noticed Commodity prices usually move in 10 to 15-year price cycles. The Peaks and troughs of prices have been fairly consistent and are set to gain ground in 2018. However, super cycles in commodities are nearly 50 years long and we are also seeing both short and long term cycles harmonize. Usually in this occurrence we see a sharp uptick in commodity prices that end up lasting for decades. Name one thing that can get up that fast after 50 years…I’ll wait.
While there this is only the tip of the iceberg when it comes to complex markets such as commodities. We believe there is empirical evidence that tells us now is the time for this asset class.
