Jon Ruff, CFA

A combination of factors has driven oil prices down since midyear, and while oil prices could fall further in the next couple of months, we think they’re likely to rebound in 2015. If they don’t, there could be an even bigger surge down the road.

Real assets are coming off of a horrendous year relative to diversified stocks. Meanwhile, inflation is expected to stay low indefinitely. So why in the world should anyone own real assets now?

For the US and other developed economies right now, it’s “all quiet on the inflation front.” Perhaps too quiet. That’s why we believe it’s time to get real about inflation and the investing opportunities that may well develop in the next several years.

Commodity prices soared during the first decade of this century. But now the party’s over: new sources of supply are coming on line just as demand from China is slowing, leading to expectations of price declines. So should investors shun commodity-related investments?

Recent movements in asset prices suggest that markets have forsaken any possibility of an inflation outbreak in the next decade. We believe that view is far too sanguine.

It’s been a volatile week for gold prices, which tumbled by the most in 30 years. Although gold is still not obviously undervalued, we think the recent market moves make stock prices of gold miners look attractive when compared with prices of the precious metal. 

Investors have turned bearish on commodities, particularly in the case of copper, where recent talk of a looming surge in new supply has sparked fears of a price rout. We’re skeptical about the copper supply-glut story and don’t think what’s happening in copper is a “canary in the coal mine” for the rest of the metals markets.

As UK inflation surges ahead, equity investors should be concerned. With yields on inflation-linked bonds at extreme lows, we think real assets offer a better way to combat the risk of rising prices.

Several prominent pension funds have slashed their commodity futures investments for delivering poor returns with higher volatility than usual, while failing to diversify equity exposures as expected, The Wall Street Journal recently reported. If inflation rises, they may regret it.

In the past few weeks, central banks have reaffirmed their intent to do “whatever it takes,” in European Central Bank (ECB) President Mario Draghi’s words, to address the various ailments afflicting the global economy. While central bank actions may or may not have their desired effects on the real economy, they do create short-term opportunities and medium-term risks for investors, as my colleague Jon Ruff explains below.