The best investment experts are discussing if shares are overvalued. If bonds are too expensive. If there is a bubble on these markets. The opinions, like always, are different, but no one says, shares or bonds are undervalued, or very cheap.

Forgotten investment is good

Almost nobody is saying anything about commodities. Nobody cares, only some hardcore experts. And that is a good sign, in my opinion. Forgotten investments at “dirt cheap” levels, with low valuations? Welcome, seems to be the best buy for me. Maybe the chance of a lifetime.

The crude oil was on many years low in February 2016. Platinum is very cheap (palladium isn’t), coffee is near many years lows, wheat and corn are, at least, not very expensive. Cacao was really cheap some years ago. In general, prices of most commodities are relatively low in the last months, years. That is showing us also the CRB Commodities Index (CRY), with its newer name, the “Thomson Reuters/CoreCommodity CRB Excess Return Index”.

17 years low

As you can see on the chart, the orange line, the index is moving in a downtrend, since June 2008, or April 2011. It was only lower in February 2016 (crude?), and before, in 2002. So, commodities are near 17-years low now!

But I was wondering how inflation can modify this picture. I searched for long term data and found the mentioned CRB Commodities index since January 1994. So I made an inflation-adjusted version of the index, I re-calculated practically the index value on the price level of 1994.

My surprise

Surprise! The CRB Index was at 118.5 points on the 31st of January 1994, and now, near 180 points. That is only 52 percent growth. But, the inflation of the US dollar (growth of consumer prices in the USA) was around 74.8 percent in 25 years. That means, commodities are cheaper than in 1994. The adjusted index value is only 103.2, 13 percent lower than in 1994.

How can this be if the resources of the Earth are depleting?

The fact is, after 1994, the commodities prices began to surge and we can observe two other uptrends from 1999 and 2002. The inflation adjusted commodities prices index, about 103 in this May, was only two times lover: In February 2016, and December 2018. That means: Commodities prices are on one of the lowest levels in more than 25 years, in real terms.

Is this a trap?

Or, that is what it seems to be. I’m cautious for two reasons. One is the famous contango. That means, longer commodities futures prices are higher than near-month settlements. That is good for short sellers, but bad for long buyers. And this can influence also the values of indexes.

With other words: The fall of the index can be in part a result of this contango. A “roll-over loss”, a technical issue. WTI type Crude was about 15 USD in January 1994, now, 56.50. Gold also tripled in 25 years. Some soft and agricultural prices are not so high. What is a reality?

More and more questions

The other reason why I’m cautious is, I don’t know if, in 1994, the prices of commodities were high or low. The CRB Index was invented allegedly in the ‘50s already, but I can’t find earlier data. Why are they publishing only the data from 1994? I must continue my research.

(Cover photo: German mines. Pixabay.com)