I remember traveling to the southern coast of Spain in the summer of 2010 to look at real estate investments.

The Spanish property market had crashed. Bank financing had disappeared. Foreign buyers had dried up. Some properties were going for 40% below their asking prices of just two years earlier.

Buying Spanish property after a crash appealed to my contrarian instincts. But in the end, I couldn’t pull the trigger.

The Lure of Contrarian Investing

Many of us both admire and envy contrarian investors. Bucking the tide, betting big on a hated stock and then making a fortune is heroic.

Today, there are also plenty of markets that most investors would not touch with a 10-foot pole.

I’ve written before how both emerging markets stocks and value investing have been out of favor for a decade.

But there is another asset class out there that has also suffered. And that asset class is commodities.

The Commodity Boom and Bust

Between 2000 and 2011, commodities were all the rage.

China was gobbling up all the natural resources that Australia, Brazil, Canada and South Africa could extract from the ground.

The Financial Times and Wall Street Journal ran stories almost daily on commodity giants like miners BHP (NYSE: BBL) and Rio Tinto (OTC: RTNTF), and steel giant ArcelorMittal (NYSE: MT).

Today, most analysts on Wall Street wouldn’t recognize these companies’ names. Yet this is precisely the kind of opportunity contrarian investors like Jim Rogers relish.

Rogers likes to tell the story of how he called the bottom of the commodity market two decades ago. While the talking heads on CNBC were salivating over Pets.com, Rogers was telling a skeptical public to buy commodities.

His buy signal? Merrill Lynch shut down its entire commodities trading desk in January 2000 – two months before the peak of the dot-com boom.

Sure enough, the dot-com crash was quickly followed by a boom that lasted about a decade.

Are Commodities Back?

Commodities themselves crashed in about 2011. Investors in these have had to endure a long, drawn-out bear market.

But some contrarians see signs of a turnaround.

As Frank Holmes of U.S. Global Investors recently pointed out, commodities just had their “Merrill Lynch” moment.

Blenheim Capital Management – once the world’s largest commodities fund – has just called it quits. At its peak in 2011, Blenheim managed $9 billion in assets. By the time it closed up shop, its assets had tumbled to $1.5 billion.

Once the big dogs throw in the towel, it’s time for contrarians to move in.

Holmes points out that the same thing happened with gold. In July 2018, Vanguard closed its $2.3 billion Precious Metals and Mining Fund. As if on cue, gold prices began to rise.

Over the next year, the yellow metal gained some 20%, eventually hitting a six-year high of around $1,566 an ounce. Gold mining stocks – measured by the NYSE Arca Gold Miners Index – fared even better, returning an eye-popping 45% over the same period.

Is Now the Time to Bet on Commodities?

An ideal investment has three elements: First, it is cheap. Second, it is ignored or hated. Third, a triggering event has signaled a turnaround.

Let’s accept that commodities are both cheap and ignored. What about a triggering event?

I’m of two minds on this. On the one hand… stories of Merrill Lynch and Vanguard closing down funds at the bottom of the market are compelling. And you can argue that the closure of Blenheim is such an event.

On the other hand… You still need a reason to invest today, rather than, say, five years from now.

Today, it’s hard to see what will turn the commodities market around. The global economy is slowing. Global manufacturing is in a recession. Most importantly, China’s GDP growth has slowed considerably.

If China’s 10% growth rates drove the commodity boom in the 2000s, then the drop in its annual growth rate to 6% likely explains a big chunk of commodities’ lagging performance since 2011.

Here, my experience in Spain is instructive…

I looked at Spanish property in 2010 right after the crash. As it turned out, the market continued to fall until 2016. And today, it still sells far below its peak in 2008.

I was right not to invest, despite the fall in the market.

So, yes, commodities are cheap. But they can remain cheap for a long time.

My advice? Commodities will be back. But hold off on investing until they have started to rise in price.

Good investing,

Nicholas




Interested in hearing more from Nicholas? Follow @NickVardy on Twitter.

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