Are commodities cheap?

[subgard]

Some broad commodity indexes seem to be at levels last seen in 1999.
https://markets.ft.com/data/indices/tea ... s=BCOM:IOM

It is the one thing not well represented in the current balanced passive investment schemes.

I'm not professing to know much about it, but it does seem weird when everybody is throwing money at the most overvalued assets in living memory, and completely eschewing what seems to be the most undervalued.

edit- in the link, click 5y, and scroll out to get the full chart

[Seppia]

I had the same question and asked it a few weeks ago in the investment trade log thread.
I have done a bit of superficial research and stopped because the info was enough for me to (not) make a decision.

So I'll share the little I found.

a Bernstein article I found interesting:
http://www.efficientfrontier.com/ef/0adhoc/stuff.htm

And here a short but effective article on the two most widely available etfs tracking commodities:
http://www.investopedia.com/articles/in ... s-etfs.asp

The things that made me rule out owning commodities via etfs:
- these etfs use futures, so they are affected by contango (bad) or backwardation (good). You don't get a "real" tracking of commodities prices.
- a very high percentage of the etfs is in energy, and it seems to me it's easier/more efficient to just buy energy stocks. I'd rather just own Royal Dutch.
Plus, I was looking to acquire the "other" commodities.

For a small percentage of my net worth (I wasn't willing to put more than 3-4% of my NW in it), it seemed just a bit complicated.

So I just placed owning diversified commodities in my "too hard" pile, ended up buying some physical gold and called it a day.

[distracted_at_work]

Natural gas is at one of the cheapest points I can remember.

I've been adding positions in producers and midstreamers all the way down. The reason being that the continent is awash in a natural gas due to shale fracking for oil bringing in all this (unwanted) natural gas. Many days this last month producers needed to pay mid-streamers and down-streamers to take the gas away, as opposed to selling it to them. My bet has been that these wells, being no longer economically viable to drill, will decline enough in the near to mid term future to take the pressure off the natural gas oversupply. The demand has been steadily rising and I don't think producers are going to react quickly to replace the lost supply thus driving the price up.

I can't speak to any other commodity in the index other than oil but I don't see as big of an opportunity there.
Oil is more a geopolitical game right now I think.

Personally I would rather own a low cost, low-debt producer instead of the physical commodity.

[wolf]

Personally I think, that commodities are cheap. A commodity etf has a 10% asset allocation in my portfolio. I do this out of diversification reasons, because I like the idea about the negative correlations to other asset classes. Of course I don't know how commodities will do in the future, but I am confident of my uncorrelated, diversified portfolio, at least in the long run (>10 years)
I think commodities are cheap, because of:
- the historical lows of the commodity indexes
- the historical lows in the ratio between commoditys versus equities (GSCI:S&P500)
First I bought commodities last year in december. In the last two months I did a monthly reevaluation to buy the second half of my favoured asset allocation. Nowadays I do see that commodities are cheap in a historical context. I wait to buy, because I think that a (small) downturn of the stock market could have a negative influence on commodities as well. I think my underlying belief is, that the commodity market works in cycles.

[NPV]

a Bernstein article I found interesting:
http://www.efficientfrontier.com/ef/0adhoc/stuff.htm

I thought the article was insightful until this point:

Let’s fast forward forty-six years to the NYMEX crude pit in lower Manhattan today. It’s a few minutes before 2 P.M. and what you see boggles the senses: a pullulating mass of huge guys elbowing each other and howling at the tops of their lungs in fits of greed. What you don’t see is big offers coming from independent traders or even from brokers for the major oil companies. Now the largest offers are coming, ultimately, from folks with names like PIMCO and Goldman Sachs. And their clients are hardly scared stiff of deflation. Quite the opposite in fact—these big commodities funds and hedge funds are looking for insurance against inflation. How else does one explain $75 oil and a supply chain brimming with the stuff?

I am not sure how the producers of oil and other minerals are qualitatively different from the 1960s farmers from the standpoint of intrinsic interest in hedging? Sure, XOM is not as strapped for short term cash as Uncle Joe the wheat farmer, and is more sophisticated. But the underlying economics is the same: as a commodity producer, you live and die by commodity price, and would love to lock in at least a healthy portion of your production at a price which locks in a profit. Same logic applies for XOM or uncle Steve from Texas who has a few stripper wells on his property. Most buyers of commodities, on the other hand, are not nearly as exposed to these price fluctuations. Oil refineries live and die by the spread and could care less about the price of oil or gasoline by itself (although would love - and do - hedge that spread, but that is another story). The end consumers spend only a few percentage points of their income on gasoline hence do not care enough to hedge this cost.

Basically, 100% of producers rely on commodity price to survive and thrive. A much smaller percentage of suppliers (e.g., a coal power plant with 20-year financing) is that sensitive to the price of that input. Hence there should be more people who want to sell at a locked in price than those who want to buy, assuming neutral expectations about future price.

What am I missing? Is there data showing that there is more money long commodity futures than short them (excluding speculative interest)?

[subgard]

I think what he is saying, is there are more "investor" type characters buying futures as a hedge against inflation than there are producers selling as a hedge against deflation.

This creates a "contango" market, where future prices further away are higher than future prices closer.

You can actually speculate in natural gas futures 12 years away. 2029 natural gas futures are significantly higher priced than Dec 2017 futures.
Indicating that it's financial types buying them as a hedge against inflation.

Considering that natural gas producers have no real need to hedge over a decade into the future, these futures were probably created specifically to serve as hedging instruments for investors.

[bryan]

They were cheaper early-mid 2016..

VAW, JJC, DBB, PKB, SLX, to name a few, are in my portfolio. You get exposure via certain "emerging markets" as well.