2017 – A Year for REAL Assets?

2017 – A Year for REAL Assets?
Dec

14

2016

2017 – A Year for REAL Assets?

While interest rates and the soaring dollar have investors’ attention now, it is inflation that could start grabbing headlines next year


We’ve talked readily about the ongoing bear market in commodities and the money to be made by option sellers that know how to take cash from it.

But the tide of inflation may be changing – to the benefit of commodities prices.

Barron’s Koplin Tan provided an intriguing piece in the November 14th issue entitled The View From the Penthouse. In it, Koplin provides a stunning chart showing Real Asset values currently at ALL TIME lows relative to Financial Asset Values. That’s all time, including WWII, the great depression and the global financial crisis of 2008.

The chart comes courtesy of a piece from MarketWatch touting Bank of America’s Michael Harnett’s advice: “Buy humiliation, sell hubris.”

Harnett’s analysis? “Today the humiliation is very clearly commodities, while the hubris resides in fixed-income markets.”

The chart appears below:

Real assets such as bullion, property and commodities tend to benefit from inflation while financial assets tend to wither. Real assets currently find themselves at all time lows in relation to financial assets – a condition that could rapidly reverse if inflation clicks upwards in 2017.


Koplin points out that during times of inflation, financial assets, especially bonds, tend to wilt. At the same time, by definition, the prices of real assets tend to well, inflate. Our previously mentioned piece on gold makes the case for 2017 inflation.

Thus, despite what you may think of Trump, where stocks may go or what happens with interest rates, hard assets such as coins, property and yes, commodities, appear to be a screaming buy for the longer term.

Yet for option sellers who do not speculate on such things, a bull market in commodities can provide every bit as much reward as that enjoyed by the speculator – without perhaps, all of the risks, whipsaws, and potential to be “wrong.”

Using Your Advantages

If hard assets do indeed turn out to be the next great bull market, trying to hit the home run by picking the best ones to buy and hold could still prove taxing. The more consistent strategy likely involves meticulously chipping away at those little edges over and over, the kind of edges that selling options can provide.

At the end of a year, those little edges can add up to a considerable pot.

As an option seller, you give up your chance for that home run in exchange for gaining a number of little edges in the market. You can use those advantages to keep taking money off the table as it falls, without reaching for the whole pile.

Guys like Harnett describe real assets as tangible “things” like a piece of property or a bushel of soybeans. Robert Kiyosaki, author of the Rich Dad, Poor Dad series, describes a real asset as something that puts regular cash in your pocket – not takes it out. By selling options on commodities, you can potentially satisfy both definitions, and make it a great year for yourself – whether commodities boom or not.

I wish you a productive month of option selling and a very happy holiday season.

-James

  1. May I paraphrase Marguerite’s question but in regards to Milk? There seems to be plenty of OI, just curious if you folks ever touch it.

    • Michael Gross Says:
      January 9, 2017 at 3:18 pm

      Carlos,

      We keep hearing about how the Milk contract will be the next big thing in futures. Indeed, there seems to be some decent volume building there. However, the options are still too thin for our liking. In addition, James and I have over 50+ years combined experience trading markets like soybeans and crude oil. We have zero years experience trading Milk. That, for one, will probably keep us out.

      Thanks
      Michael

  2. Marguerite Says:
    December 15, 2016 at 2:38 am

    Hi James, Why is Sugar a commodity that you do not sell?

    • Michael Gross Says:
      December 15, 2016 at 2:51 pm

      Marguerite,

      Sugar is a commodity that I follow closely. However, the volatility in the options is often so low that it makes them difficult to sell at any reasonable strike.

      Occasionally, there are opportunities for taking premium in sugar. Unfortunately, at least from my perspective, those opportunities are few and far between.

      Thanks,
      James

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