Are Commodities a Good Hedge Against Inflation? – Episode #340

When inflation begins straining investor nerves, questions about commodities—especially gold—as a hedge against rising prices are sure to follow. Where do commodities fit as an investment asset? What are derivatives and futures? Why would you want commodities in your portfolio? Get the answers to these questions and more on this episode of the Dentist Money™ Show.

 

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Podcast Transcript

Ryan Isaac:
Hello everybody, and welcome back to another shiny, sunny episode of the Dentist Money Show, brought to you by Dentist Advisors a no commission, fiduciary comprehensive financial advisor just for dentists all over the country. Check us out dentistadvisors.com. Today on the show, we have a special guest, it’s a panel discussion with myself and Matt and Rabih Dimachki, Investments Operations Manager at Dentists Advisors. We are talking about a common question, although a specific subject, so a really common question we get from clients and dentists all over the place is, “Should I own blank, x, y, and z? Should I own this thing as part of my investment strategy?”

Ryan Isaac:
Today, the question is about, “Should I own commodities, and what are they? How are they defined? How do you buy them? How do you interact with them? What’s their history, what do they do in a portfolio? What are the risks and costs and all kinds of things?” Rabih’s just the smartest person in the world. We’re grateful for his time, and to Matt as always and thanks to all of you for always tuning in and being here with us. We hope it’s helpful to you and that you get a lot of information and insight, and it helps you make better financial decisions along the way in your career path. If you have any questions for us, you can go to dentistadvisors.com, you can click the Book Free Consultation link, and we would love to have a chat with you any time. So thank you for being here and enjoy the show.

Announcer:
Consultant advisor, conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor.

Ryan Isaac:
Hello, Dentist Money Show listeners and friends. I would like to invite you to join us for something new and exciting, it’s something we’ve never done before, but we’re all very excited about this. On June 22, June 22, we are going to do an episode of the podcast, the Dentist Money Show, but we’re gonna do it live, which we’ve never done before. And again, that’s June 22nd, 2022, which is a Wednesday, by the way. You will be able to tune into the episode as it happens as we record in the studio at 5 pm mountain time, June 22nd, and we’ll be taking questions on air. You can join the conversation and submit questions live, upvote the questions from others that you’d like to hear answered.

Ryan Isaac:
We will also be announcing the release of a brand new Dentist Money service that we have had in the works for years and have been excited about and have feedback from many, many listeners and clients and dentists around the country for years about this, and we’ve been waiting for it for a long time. So we’ll have more info about that on our live podcast episode, which again is Wednesday June 22, 5 pm Mountain Time, and to register for the live show and to get the Zoom log-in instructions, go to dentistadvisors.com/live. That’s dentistadvisors.com/live. It’s gonna be awesome. We’re super-excited. We’d love to see you there. Thanks again for joining us, enjoy the rest of the show.

Announcer:
This is Dentist Money. Now, here’s your host, Ryan Isaac.

Ryan Isaac:
Welcome to the Dentist Money Show, where we help dentists make smart financial decisions and avoid the bad ones along the way. I am Ryan, I’m of course here with the Hollywood mountain, Matt Mulcock, but we’re not done because we’re also joined by in-house guru of all gurus. Nice and smart guy of all nice and smart guys, Rabih Dimachki from Dentist Advisors, Operations Manager of Dentist Advisors. Investment Operations Manager at Dentist Advisors. Rabih, what’s up, man? Thanks for joining us.

Rabih Dimachki:
Thank you guys for having me. How are you doing?

Ryan Isaac:
Good, and we appreciate the fact that we messaged you like two hours ago, and we were like, “Hey, can you come talk with us about some stuff today?” And you were like, “Yes.” I have… Here are some things that are on my mind, is if you…

Matt Mulcock:
That’s the think that I thought was… Like, honestly, it’s so fun having Rabih on here, ’cause A, there’s no one more capable of you being able to do that with and saying like, “Hey, do you wanna hop on and talk about this complex topic?” And he not only says yes, on the spot, he even sends you four or five bullet points…

Ryan Isaac:
Bullet points.

Matt Mulcock:
Of things he’d wanna talk about. [laughter] And he didn’t even know you were gonna ask him. Rabih is my mentor spirit animal guru… Like, he’s all the things.

Ryan Isaac:
How many people can you message and you’re like, “In two hours, can we talk commodities?” And they’re like, “Oh yeah.”

Matt Mulcock:
Heck yeah, man.

Ryan Isaac:
Here’s some things that are on my mind right now. Here’s my four points.

Matt Mulcock:
I actually wrote an essay about this last night for fun.

Ryan Isaac:
It is really amazing. Today, we are gonna talk about…

Rabih Dimachki:
Thank you guys.

Ryan Isaac:
You’re welcome, man. Thanks for being here. Mattie, thanks for being here as always.

Matt Mulcock:
Yeah, of course. Good to be here as always.

Ryan Isaac:
Today we’re gonna talk about commodities, what they are, how they behave, how you buy them, what they do, what they mean, should they be in a portfolio? Are they already in your portfolio? I wanna preface this with a few common questions, ’cause we’re gonna bring this discussion down to the level of dentists here about these things and they wonder what they do and what they mean, and should they own them? And depending on where the dentist got the information, Facebook group, a friend, hype-up seminar somewhere, they might come away feeling like really…

Matt Mulcock:
Kids soccer game.

Ryan Isaac:
Okay, we were talking about this before the show. It’s a whole other episode. We won’t spend time on this, but we were saying that it’s really common, it’s just a human thing to hear stuff, feel insecure about like, “I don’t have that, I don’t do that,” and then just go repeat it to someone else as if you do know it, and you can barely pronounce it and you definitely can’t re-explain it to anyone, but you’re like, “Oh, I should go do these things,” it’s just… It’s a common thing we hear as advisors, a lot of people will hear stuff and they’re like, “Oh, we should do this and this and that. Right, right?” And… But they’re just repeating things they heard and feeling like maybe insecure about it or rushed or a little FOMO. There’s a big difference in life between knowing what something is versus knowing why something is. And it’s easy to know what something is, like Bitcoin or commodities or like do… You hear something and you’re like, “That’s a thing. I know what it is in name.”

Matt Mulcock:
Sure.

Ryan Isaac:
But do you know why it is? And  ____.

Matt Mulcock:
And how it can serve you, right?

Ryan Isaac:
Yeah, and what is its point? And so anyway, Rabih, what were you gonna say about this? You got thoughts here, you got bars coming.

Matt Mulcock:
Bars.

Rabih Dimachki:
Yeah, I’m gonna go straight into commodities and start with a controversial question of, “Would you consider them an asset to start with? Would you consider a commodity an asset?”

Ryan Isaac:
Okay, well, okay, so pin that question really fast, here’s where this comes into play from clients, dentists ask, “Should I own commodities in my portfolio?” I wanna ask the question before we go to Rabih’s, why are they asking this question? I haven’t heard this for a while. It’s cyclical when I hear about this, I don’t hear about this annually.

Matt Mulcock:
I know where you’re going with this.

Ryan Isaac:
I hear about this every five to seven years, maybe the commodities… The last time I can really think about commodities, and usually when I say commodities, people are talking about precious metals, which we’ll get there, I’m sure.

Matt Mulcock:
I just got this email last week.

Ryan Isaac:
Mid-teens is the last time I really remember people really, and then before that, it was like 2010. So first the question is, that’s just where it comes from, that’s all I wanna say. Back to Rabih’s question, is a commodity… What did you say? Is a commodity an asset?

Rabih Dimachki:
An asset.

Matt Mulcock:
You’re asking each individually?

Ryan Isaac:
Matt, what do you think about that? What do you think, Matt?

Matt Mulcock:
My inclination would be, yes, it is an asset. But I think asset is on a spectrum, so I’ll give an example, technically, if someone said, “Is my personal residence an asset?” Technically, yes, it is your balance sheet, we’ll call it an asset, we define it as an asset, but that is a far different asset on a different part of the spectrum as your diversified portfolio of equities in your brokerage account. So in that same vein, I think, yes, commodities are an asset but far less usable in a portfolio than equities.

Rabih Dimachki:
This is great. Matt, you’re right.

Matt Mulcock:
Yes.

Rabih Dimachki:
But, if we wanna narrow it down more, now we can say, “Are commodities a return producing assets?” And this is when the conversation…

Ryan Isaac:
A return producing asset, yes, that is one of the big questions. I was gonna say…

Matt Mulcock:
Are you shuffling cards right now?

Ryan Isaac:
I’ve got cards in my hand, these are old credit cards in my wallet.

Matt Mulcock:
Gift cards.

Ryan Isaac:
Gift cards that expired, a zoo pass from a city I used to live in. Library card.

Matt Mulcock:
Friday is wallet clean out day for Ryan.

Ryan Isaac:
Vons club card. I don’t even… I don’t know. I’m a fidgeter. I was gonna say, I like Matt’s answer about being on a spectrum. Most commodities are purchased on contracts, you have a contract to receive a delivery of beans or something, [laughter] of corn or something, like can I hold the contract…

Matt Mulcock:
Pork belly.

Ryan Isaac:
Pork Belly, I was actually thinking about that. Okay, so if I’m holding a contract to receive delivery at a certain price, expecting them to be able to… Expecting to be able to offload them at a different price, can you call that… This is where the whole subject of derivatives comes into play, where our sophisticated market systems develop things that are assets, but they’re derivatives of assets that are like… They’re not… If you go buy 100 shares of Apple stock, I own 100 shares of exchangeable redeemable Apple stock as long as Apple’s a company. But when you get into derivatives and contracts and deliveries, it feels muddy, which is probably where we’re going. What’s the right answer, Rabih is… Well, you said actually is an income or is it a…

Matt Mulcock:
A return producing asset.

Ryan Isaac:
Return producing asset, so what do you mean by that? What is that? What’s that path?

Rabih Dimachki:
So when we look at the assets that we usually find in our investment portfolio, whether it was the stock or a bond or real estate, you have a return element coming out of them, it might be the dividend or like a stock buy-back these days, it might be a coupon you’re getting on that bond, or it might be the rent you’re getting from the real estate you’re lending out. This is a type of asset that does not give you a return component, it is still an asset, as Matt said. Gold is an asset because 2000 years ago and 2000 years into the future, Gold will still have a value. It has a utility and the relationship between humans.

Ryan Isaac:
Unless we find a planet made of gold that we can send spaceships to and mine it all, and then it’s not anymore.

Rabih Dimachki:
Yeah, that’s…

Matt Mulcock:
It’d still be an asset would be greatly diminished in value, right?

Ryan Isaac:
Like tinfoil. Okay anyway carry on.

Rabih Dimachki:
Exactly, wheat as well, wheat as a grain is an asset, 2000 years ago it was very important because you can make food out of it, and the future, there still might be a possibility that it’s still an asset with the same value. So it is an asset that maintains its value with time, but it is not an asset that produces return. This brings us to the conversation of why would I want an asset that does not produce a return in my portfolio to start with?

Ryan Isaac:
Can you dig on that a little bit, does not produce a return. If I’m hearing this, I think someone would go, Well, I owned gold during 2008 and I got a return on it, ’cause it grew in value, so that was a return. What do you mean it doesn’t produce a return?

Rabih Dimachki:
This is great because the price of an income produce or return-producing asset like the stocks, bonds and real estate, there are two components for how their price changes. It might come from the future expected return that’s coming, and it might come from the supply and demand on the price of that security. Whereas in commodities, the only effect on prices is actually the supply and demand. So when times are rough, there’s a war, people are afraid of inflation, there is demand for Gold, the price of Gold goes up. Does this mean the Gold produced a return for you?

Ryan Isaac:
No, no.

Matt Mulcock:
You’re saying it’s missing a component compared to a stock in the sense of it’s basically purely just belief, it’s just speculation, it’s what you think is going to happen to that asset based on exterior events happening.

Rabih Dimachki:
Correct. It’s supply and demand, if you wanna summarize it, it’s supply and demand, and Supply and demand it’s not just speculation, it’s really based in our economy. Like Copper in the past 20 years has been more important than it previously were. Iron during the late 18th century was very important because of all the railways, before that, before oil was discovered, the grains market, the future’s market of grain was much more important. So there is a cyclicality to when the commodity is needed and the cyclicality can really stretch. It might be a couple of months, just like what we have with gas for our cars, and it can span over long periods of time depending on the evolution of the human race and the technology and the stuff they need at a current time.

Ryan Isaac:
Are you… Is there… There’s a phrase rattling around my head about expected return. Again, if I go by 100 shares of Apple, Apple is a company that produces revenue, that creates jobs and has profit and then re-invest the profit to keep growing and growing and doing all those things.

Matt Mulcock:
Or pays dividends.

Ryan Isaac:
Or pays dividends, it has an expected return like a house or a dental practice would because there’s a history of it growing and growing for a reason, and creating value for a reason. Where you’re saying commodities, gold… Let me just take Gold for example, precious metals, I only have this conversation a lot every five to seven years because it has value and basically it’s like a mood indicator. When people are scared about other things that aren’t performing temporarily, they have this feeling that they should just buy some gold because it’s valuable ’cause it’s scarce and then temporarily the price goes up, but it’s not because it produces anything, creates jobs, there’s no income, no revenue, no dividends, it didn’t innovate, didn’t build new cars or planes or cell phones or anything like that. So does the phrase “expected return” play into that equation?

Rabih Dimachki:
In a passive sense, I would say no. A buy and hold strategy in commodities, I would fairly say it has a zero expected return. What’s gonna happen, you’re gonna buy, for example, Copper at any day in a business cycle, and when times are tough, and you think we’re gonna go into a recession, you’ll see the Copper price go down, but once the economy starts opening up, and you expect that more products, electronics in this case, because we’re talking about Copper is going… The demand is hyped up, Copper price is gonna go up, and then you’ll see the Copper price going up, but over the long run, this is a cycle, and if you’re just gonna buy and hold like you’re supposed to do in an investable asset that…

Ryan Isaac:
You don’t get anything from it.

Rabih Dimachki:
Produces return, you don’t get anything from it. So this will actually narrow us down into the conversations like how will I get returned from commodities for it to actually deserve a place in a portfolio that I’m depending on to retire and a passive way is not the answer.

Ryan Isaac:
Okay, so the traditional way to get the most out of an investment in public investments like build a good diversified portfolio and hold it and save money for long period of time, it doesn’t work with the commodities. Can we really quickly define commodities, really for people. What does it mean when we say commodities?

Rabih Dimachki:
Absolutely, it’s literally items, goods in our economy that we depend on so much that price sensitivity affects us, so we create a market where we transact what the expected price in a month or three months from now is going to be, and we call this the commodity market. There are markets for precious metals, we’re talking about Gold, Copper, Lithium, those all don’t go in the same direction. Copper goes against Gold, Lithium is a whole new thing with the EV market coming up, you’ve got for agricultural products, we’re talking grape, coffee, lemon, rice…

Matt Mulcock:
Pigs, cows.

Rabih Dimachki:
You’ve got Livestock. Yeah, everything.

Ryan Isaac:
Livestock.

Rabih Dimachki:
Yeah, you’ve got livestock, and as many as as you want.

Matt Mulcock:
So you just said something interesting Rabih that I was thinking about is we’re talking about producing versus non-producing and expected return, and I think it’s made the argument there like, it’s based on that framework, it’s hard to think about commodities having a place in a portfolio in any… For any real reason around… Again, what you just highlighted, they don’t produce anything. Could you make an argument… Oh, go ahead.

Ryan Isaac:
And I was gonna say, and if you held them for a long period of time like you should with any other investment, business, real estate, stocks, you don’t really get anything from it.

Matt Mulcock:
It doesn’t make sense, yeah. What about from another framework and something Rabih, I know you and I have talked about in a world that has become more difficult in investing to find this whole concept of correlation and non-correlated assets in the world of globalization…

Ryan Isaac:
Good question.

Matt Mulcock:
And I know this is changing. As you said, everything is cyclical, and right now we’re cycling out of globalization, I’d say, so maybe this changes in the future. But over the last 10, 20 years, we’ve become so globalized, at least on the equity side, it’s hard to find non-correlated assets. So from that standpoint, do you think commodities have a place in a portfolio simply from the correlation aspect to equities?

Rabih Dimachki:
This is a great question, and here I think we should differentiate between the portfolio we are looking at. We are… Like this podcast is addressed to dentists who are holding an individual brokerage account that they hope they can retire on into the future. That portfolio and the lifestyle of a dentist, the sources of risk that affect the revenue stream of a dentist are not exposed to any risk that a commodity can hedge. However, in other contexts, companies that work with commodities, whether they depend on it, like airline companies where they depend on the price of oil for their flights or a farmer who will depend on the price of fertilizers for their yield, those people, in their…

Rabih Dimachki:
If we wanna look at it from a broad perspective, looking at their portfolio as their whole life, we’re talking modern portfolio theory in the sense, the addition of those commodities affect the volatility of the their returns and in their life, not just as their portfolio. And this is where you will see that it might fit. However, in the context of a dentist, what is the revenue of a dentist exposed to? It’s exposed mainly to the income of the clients, and it’s inherits in our generations from being a child until you lose your teeth when you’re older. You know the demand is there. The demand of needing a dentist does not fluctuate.

Matt Mulcock:
It’s so stable, yeah.

Rabih Dimachki:
And it’s stable, you will not need exposure to a commodity, whereas if you run an airlines company, the demand for gas will fluctuate, and now because this is a risk for you, you would want to go and invest in oil futures in a sense where you use that correlation to cancel out the risk and make your demand stable. So in a sense, the dentists are ahead, they’re just hedged away from volatility and commodities. And for a dentist why would you put it? However, if you are a big company that’s trying to hedge its costs, well, that’s where commodity has a place in a portfolio.

Ryan Isaac:
So, in the dentist’s example, you could say, a huge DSO organization or a giant group practice that uses a certain supply that fluctuates with market cycles, that it becomes really cheap or insanely expensive, could use some kind of contract on their supplies. It’s like the same thing as an airline would do with gas, or a farmer is doing with the grain or sometimes like…

Matt Mulcock:
Yeah, hedging strategy, right?

Ryan Isaac:
They’re hedging because their businesses rely on these things that are cyclical and can either create a lot of profit because they’re really cheap and there’s a lot of margin, or they can send you out of business because you can’t even pay for your own supplies. It would be like a dentist hedging with cyclical supplies that they have to buy constantly on a huge large scale, but it’s just not something they have to deal with.

Matt Mulcock:
But what’s so insightful what Rabih is saying is so cool is that… And Tell me if I’m wrong, Rabih. That the dentist inherently is already hedged against the volatility of the market with their skill set and their private business or their practice. Right? Like it’s already happening with their private business that they own, or if you’re an associate, we will call yourself like you’re a human capital, which is your ability to create income for yourself based on your skill set, is already hedged against the ups and downs of the market. So you are the commodity, like why would you… Right? Like why would you need additional commodities to hedge against or to de-correlate in your portfolio. Right?

Rabih Dimachki:
Right. The only commodity you have to hedge is your human capital, and this is a topic about insurance, the stability insurance.

Matt Mulcock:
Oh, my Gosh.

Rabih Dimachki:
Right? However…

Ryan Isaac:
Woah.

Matt Mulcock:
Rabih is just like my… These…

Ryan Isaac:
Hold on, yes.

Matt Mulcock:
I Love it so much.

Ryan Isaac:
Wow, that was deep. Carry on… Yeah, That was just like, Wow, that’s exactly… That’s how they’re hedging, is they’re protecting their ability for their hands to do dentistry and their brains to continue doing work, in the dentistry.

Rabih Dimachki:
And that’s why we’re dental-specific and in the context of a dentist, what is it that we are trying to hedge and how are we incorporating it into the portfolio. Outside of dentistry, if you know, dentist advisors was a side business, helping some…

Matt Mulcock:
Coming soon.

Rabih Dimachki:
Some…

Matt Mulcock:
Coming soon.

Rabih Dimachki:
Yeah, helping some oil-miners manage their money, then it’s gonna be a different conversation of what you’re gonna include in the portfolio.

Matt Mulcock:
The oil money show is coming up. Yeah.

Ryan Isaac:
Oil money Show… And I was just gonna say on that example, a dentist is hedging against their career risk, which is insurance, like you said, disability and life insurance. They hedge it against their career risk through holding lots of liquidity and running a business with a high profitability, that’s how they’re hedging. Those are the things that they’re being careful with. The stock market and investing, they’re hedging like a lot of us do against inflation by investing in an asset that grows.

Matt Mulcock:
And longevity risk. Right? Yeah.

Ryan Isaac:
And longevity, and longevity by having balance instead of burnt-out, balance over burn-out. Okay so, to back this up a little bit, I’m just trying to think of the mind of a dentist who only hears the word commodities and you should own some and then that’s about it. To repeat what you said before, I just pulled this up really fast, commodities are broken down into soft commodities and hard commodities, but you said all these. You have energy, precious metals, base metals and agriculture. I guess, livestock would maybe be agriculture too. So those are… That… Commodity is just all that stuff. How do you actually buy these things? So again, if I’m in a Facebook group and they’re like, You should own commodities during times of high inflation and recession worries, and then they repeat that back to us, should we do this? How does someone even buy base metals, precious metals, agriculture, energy? And how do you even pick which sector of commodities to get into, I mean it feels like you’re back to square one, where like, “Well, there’s thousands of things that you could possibly be involved in.”

Matt Mulcock:
It’s like a whole other world. Right? It’s like crypto.

Ryan Isaac:
So how… It’s just like, yeah, how do you even narrow that down on top of your practice and your real estate and your already diversified portfolio and savings rate and profitably and everything? So the two questions are, how do you even get involved with commodities? How you even buy and sell and trade them? ’cause I think people think you just click a button and then you just got commodities. And then how do you even narrow down which sectors of commodities to even participate in?

Rabih Dimachki:
Yep, I’ll try to make this simple. But for a commodity…

Ryan Isaac:
[laughter] Yeah. Thanks, man.

Rabih Dimachki:
For a commodity, it’s simply giving up your cash and holding that asset, so there was a direct investment in it, which is silly. If you go to a grocery store, buy five pounds of bacon and put them in your freezer, and then a year later resell that bacon, it’s like you’ve invested physically in that asset, given that Matt was mentioning two days ago how bacon appreciated in price due to inflation.

Ryan Isaac:
Yes.

Matt Mulcock:
Yeah.

Rabih Dimachki:
So in a simple sense, there’s a direct investment. Go buy the thing and store it. If you don’t want to store it, you can access the financial markets where you trade a commodity in the futures market. And what is a futures market in a simple form? The future market is what everyone in the market predicts the market… The price of the commodity will be in 30 days from now, or 60 days from now, or 90 days from now.

Ryan Isaac:
So use corn for example, what’s a futures market for corn in that example? How does that work?

Rabih Dimachki:
What happens is that, a bunch of big banks create a marketplace where people will put their bids as to what they are willing to buy or sell a ton of corn in 30 days. And that price will fluctuate. So what happens is that a big popcorn-maker, for example, will go and say…

Ryan Isaac:
Orville company man, Orville walks in. Yeah.

Rabih Dimachki:
They go in and they’ll be like, I’m happy with buying corn at 30 bucks a pound for example. I’m very sorry. I don’t know about the corn…

Ryan Isaac:
Yeah. You don’t know. A ton… A ton, a pound.

[laughter]

Matt Mulcock:
Someone’s out there right now like “Rabih, you’re so wrong.”

Rabih Dimachki:
Yeah. Like I was like Shane has corn for 30 bucks. But let’s…

Matt Mulcock:
All those commodity traders that they listen to us. Yeah.

Ryan Isaac:
Yeah. Yeah, yeah.

Rabih Dimachki:
Yeah. I’m sorry I’m failing you today. But the point is the corn maker, the popcorn maker will go and say, okay, if I have the chance right now to buy corn in one month and I’m gonna buy it at $30 a pound, and I’m not sure if it’s gonna go to $40 a pound in a month, if I want to go and instantly buy it, let me buy that future contract. And I lock in this price. And in 30 days from now, the difference between the 30 that I locked in and whatever the actual price in a month on that day is, it is gonna be a profit or a loss for me. So in a sense, I hedged it. So the second way to do it is by buying a future contract and the third way is by actually exposing yourself to the popcorn maker itself, as in a popcorn maker, if the price of corn goes up, they’re gonna increase the price of a bag of popcorn that they sell you. And if they increase the price of the popcorn maker assuming it does not lower their revenue, they are bringing more money in which means the stock price may go up.

Ryan Isaac:
So you mean through… So you can access. Okay. I’m glad you just said that. It’s an important point to make. You can access the effects and I guess the experience of a commodities market through owning the stocks of the companies who deal in commodities for a business as a business. Yeah.

Rabih Dimachki:
That’s right.

Ryan Isaac:
Okay. And then it just goes back to, well, do you buy that popcorn maker because they run a really good business and they have a solid team. And if their prices go up, they’re gonna be really smart and actually improve their margins, because they’re gonna increase prices just the right way to have people keep buying popcorn and then they’re gonna make more money. Or do you not buy that company as a stock owner because you don’t have confidence in their ability to execute when their inventory gets too expensive. And they’re actually gonna have smaller margins and lose money and not have as good of a dividend. And so you shouldn’t own that stock. It is still a very complex…

Rabih Dimachki:
That’s right.

Ryan Isaac:
Analysis.

Rabih Dimachki:
That’s right. So in a direct investment where you’re just buying the corn, the only risk you’re exposed to is the actual price of corn when…

Ryan Isaac:
Yeah. You hold it and then you’re like, oh man, now it’s not… And I guess I gotta eat it. Yeah.

Rabih Dimachki:
Right. When you invest in a future contract that has a corn, you are exposed to the price of corn, plus a risk of settlement or what the future curve is, which are another stuff we can talk about. And when you invest in the company, you are exposed to the price of corn and the management of the company and the industry itself, whether there’s… So there are multiple layers of risks that you are accumulating and this is where the expected return comes to an end. And this is up to the investor to decide.

Matt Mulcock:
And then Rabih just highlighted something again so great that like when someone sends an email and says, “I think I should own commodities.” I think what we’re uncovering here is that is like, what does that mean? That there’s such a different world here and Rabih, something that you said earlier too, not only the layers of like, how do you want to own this? Whether you’re talking about corn, you’re talking about gold. I think Ryan, and you said it like when people talk about commodities, they’re…

Ryan Isaac:
It’s usually gold.

Matt Mulcock:
It’s gold or it’s silver or it’s precious metals and it’s the same concept. Right Rabih, you could either buy the physical gold and have it. And this is the other thing too. The cost of that, I don’t know if people realize.

Ryan Isaac:
Of storage.

Matt Mulcock:
The storage, like if you go buy it from a company…

Ryan Isaac:
Delivery, storage.

Matt Mulcock:
Who’s gonna store it, unless you’re gonna put it in your house, which let’s be real, that’s not gonna happen, most likely, a company is gonna charge you to store that, that’s again, neither here and nor there, but what you’re talking about Rabih is like someone says to us, I want to own commodities. What does that mean? And the correlation between these different commodities between lithium and pork bellies and pork bellies and gold and gold versus like, and how are you gonna own it? You’re opening up a whole other world here that I just don’t think they fully grasp what that means.

Ryan Isaac:
Okay. So let’s go to the question that they, oh yeah… Say what you were gonna say, Rabih.

Rabih Dimachki:
I was just gonna say, I think people nowadays just say, oh, maybe I want to invest in commodities. It’s because it looks that it’s so accessible. You just look at ETF that trades commodities. And it’s like, oh, I got the exposure to commodities. But in a sense, just like we just had this conversation where there are multiple layers of risks you’re exposing yourself to, when you’re just buying that ETF that has the commodities in it, you’re not getting one layer of risk. There are multiple risks in it, including growing the future contract. As in, I bought a future contract for 30 days, but 30 days from now, it expired and now I need to buy a new one at a different price. And this is a big risk inherently that can completely wipe out the return from guessing when the price of a commodity will go up.

Ryan Isaac:
I was going through this exercise with a client and I pulled up the list of the top 50 commodity funds right now. And this was this year 2022 and the fluctuation between the top and the worst performers is wild. Even in the exact same sector, gold, oil, energy. Different funds are wildly [laughter] different than each other, even in the same sector, like their performance and their execution and what they’re actually trying to do and their strategy and the layers of risk that you’re talking about. How you would even select that. So here’s the question that people, when they hear this, but this is all they want to know. Is it gonna help my performance? There are the two questions, will it give me return historically and it’s always the inflation thing. So does this help against inflation? Is it inflation hedge, and will it improve the return of my portfolio? Those are the two things that they really want to know.

Rabih Dimachki:
Right.

Ryan Isaac:
And really like yes or no. And then we can just shut it down, but no… So what are the answers to those two questions, inflation hedge and improved returns of a diversified portfolio.

Rabih Dimachki:
Absolutely. Let’s simply talk about it in terms of return and…

Ryan Isaac:
Okay.

Rabih Dimachki:
In terms of risk.

Ryan Isaac:
Okay.

Rabih Dimachki:
In terms of return, I would, we just like agreed at the beginning of this podcast that it maintains its value. Like a gold is still gold no matter what time period you’re looking at it. So in terms of return, it’s maintaining its value. In terms of risk, is it moving and shifting up and down the same way inflation shifts ups and down? Because for you to consider any asset a hedge, the return and the risk component should match what you are trying to hedge. So if you’re trying to hedge inflation, then the change in inflation year to year and how much it changes within the year should match how the change in your commodity year to year and how much the commodity within the year changes.

Ryan Isaac:
Okay.

Rabih Dimachki:
And if we look at it from that sense, maybe the return of gold, because it maintains its value matches inflations on the long run, and people say that on a long, long period… I stress on this one, long period of time, gold maybe will out-perform inflation, the standard deviation of an inflation versus the standard deviation of gold are completely far away from each other that… And the timing doesn’t sync, so you can’t really say it’s hedging, the only way to hedge inflation is through treasury and inflation protective securities. So the argument here, commodities are not inflation hedge, but they are out-performing inflation, which is a great way to come to the conclusion.

Matt Mulcock:
But you know what else out-performs inflation and in a far more effective…

Rabih Dimachki:
Go ahead Matt.

Matt Mulcock:
In a far more effective pace, stocks which is, I mean come on, yeah.

Rabih Dimachki:
Exactly. Exactly.

Ryan Isaac:
By a margin that’s not even…

Matt Mulcock:
By not even a close race, yeah.

Ryan Isaac:
Is it an appropriate inflation hedge, your conclusion. I’m gonna repeat it back to you and tell me if I listened carefully enough.

Matt Mulcock:
Cascade it back.

Ryan Isaac:
I’m gonna cascade here. The conclusion is over long, long periods of time, we’re just speaking about gold specifically, it kind of does keep pace with what inflation has done, but it doesn’t outperform inflation historically by much of a margin at all, but at the same time you’re up… For about the same return as inflation is giving you, you’re taking on incredible, you’re taking on stock-like risks for bond-like returns almost.

Rabih Dimachki:
Yeah, that’s right. We can easily summarize it by saying that commodities are not a hedge.

Ryan Isaac:
Okay.

Rabih Dimachki:
But they are one of the assets that might outpace, but between the assets that outpace inflation, they’re not really the best asset to have to outpace inflation.

Ryan Isaac:
Yeah and not even… And especially we’re talking to an audience of business owners that it’s like, it shouldn’t really be in the conversation. What about… I’m gonna tell you something that I’ve told people, and I hope you’re gonna tell me that I’m correct, because I’ve told people this a lot. [laughter]

Matt Mulcock:
He’s double checking this live right now in the podcast.

Rabih Dimachki:
You’re right, Ryan.

Matt Mulcock:
Yeah.

Ryan Isaac:
Okay. So the gold conversation comes up during times of stock market and economic panic, when people are freaked out, people wanna buy gold, which makes the price of the gold to go up, and my, I guess, observation of people who wanna jump into gold when everyone’s freaked out is that simply, in order to be successful that it’s gotta be a short-term play, and they have to pinpoint the time when people are about to freak out and then buy it, but get rid of it at peak freak out before no one is freaked out anymore, and the price goes back down and it’s a very short-term cycle.

Matt Mulcock:
That’s easy.

Ryan Isaac:
And they have to nail that.

Matt Mulcock:
That’s easy.

Rabih Dimachki:
Exactly.

Ryan Isaac:
Okay.

Rabih Dimachki:
Exactly and that’s why a buy and hold strategy…

Ryan Isaac:
Doesn’t…

Rabih Dimachki:
On commodities, the passive approach will not work because you’re just gonna be riding the wave up and down.

Ryan Isaac:
Okay, so if I went back to a client said, Yeah, commodities for sure, you have to behave with commodities in a completely different way than you behave with anything else in your life, real estate, business or stocks. It has to be short term, you have to be pretty spot on, on like which things you’re gonna predict and when you’re gonna buy them and when you’re gonna sell them, and there’s several different layers of how you can get involved with them that all come with their own risk attributes and scenarios.

Matt Mulcock:
Commodities are for speculators, not for investors. Right, like businesses…

Ryan Isaac:
Okay, cool. That was way more concise than the multiple paragraphs that I tell people. Shocking.

Matt Mulcock:
No ’cause I think your approach is… No, I think your approach is great, ’cause it layers over that like the behavioral side of it, you can’t…

Ryan Isaac:
Say that again though, that’s really good though. Say that again.

Matt Mulcock:
Yeah, you’re helping them uncover, you can’t do this, and by the way, you’re not a speculator.

Ryan Isaac:
And why would you waste your time anyway.

Rabih Dimachki:
And why would you wanna be. Yeah.

Ryan Isaac:
Take your 50 or 100 grand you wanted to buy gold with and go get some new people and an associate and some new chairs and some new marketing, and drop some insurance plans and do that.

Matt Mulcock:
Go invest in your life and go on a vacation. I don’t know.

Rabih Dimachki:
I want to say that commodities are very sensitive to the economic cycle that we live in, and this is why, going back to your question about which of the commodities should I invest in, how do I choose, how do I pick. It’s really gonna depend on how that commodity interacts with the business cycle of the economy we’re going in.

Ryan Isaac:
Okay.

Rabih Dimachki:
Are we at the recession? Are we at the boom?

Ryan Isaac:
Can you use…

Rabih Dimachki:
Are we during…

Ryan Isaac:
Can you use today’s current cycle, and today we’re talking about the end of May 2022. Can you use that today’s scenario as an example of how commodities interact with the business cycle we’re in as of today?

Rabih Dimachki:
Right. The business cycle we’re in at now, we are looking at elevated inflation levels, while at the same time we’re starting to counteract that with higher interest rates. People are looking at commodities that are not yet there that will draw with expansion, so we’re not talking about the precious metals regarding AI but… And the ones related to chips, but we are looking at the precious metals like copper, like lithium, that at the beginning people need them in the raw material of the production, and this is what they would be investing. And this is not an investment advice. Go buy this right now, but what I would say each business cycle, each point of the business cycle is very important.

Ryan Isaac:
We always talk about the three main asset classes that there are to buy, a private business, which most of our listeners and clients are dental practice owners, real estate and public markets, stocks and bonds, and it’s… The way you would behave with commodities, it’s just so far out of the way you behave with these other main asset classes that it’s almost like, why… And it’s so short-term and you gotta just really nail it. Why stress about it? Why introduce that risk into your life, put the risk… Take the risk somewhere else where you have more control and knowledge and experience.

Rabih Dimachki:
Yeah. Investing on commodities does not have a great expected return outcomes, however… And this is what Matt talked about. If you have a strategy for trading in and out of commodities, you might make money, but honestly, who would want to put all this time where you have better use for it.

Ryan Isaac:
Yeah it seems… It seems it’s very tough. Is there anything anyone wanted to say but did not have the chance to say about our dear beloved commodities?

Matt Mulcock:
I have one question for Rabih.

Ryan Isaac:
Go ahead.

Matt Mulcock:
Let’s make this extra spicy. Where does… And just as I’m thinking about this, I kept having something flash in my mind that something overlaps with this, it’s much more pertinent to what’s happening in the last few years. Where does crypto, on this spectrum of asset… Commodity versus a producing asset, where does crypto fall on this for you?

Rabih Dimachki:
For me, for me…

[overlapping conversation]

Ryan Isaac:
Are we teeing up part two conversation?

Matt Mulcock:
We probably are.

Ryan Isaac:
This is just a tease.

Matt Mulcock:
I think we should.

Ryan Isaac:
Yeah. I like this. Yeah.

Matt Mulcock:
Teasing it.

Rabih Dimachki:
Is this a tease?

Ryan Isaac:
I like it.

Rabih Dimachki:
In terms of return producing assets, I would not put crypto under that category. In terms of an asset, it’s a bigger conversation of the value of that commodity in our society. There is a very clear value for gold in our society, there is a very clear value for crops, for livestock in our society, the question then becomes what value does crypto add to our society, what’s the instrumental use of crypto in our society? And, at that point, you might look at it as an asset that might be… An asset that holds value. Just like gold might hold value.

Ryan Isaac:
In the world, there’s all kinds of investments we can interact with but the reality is all of them are gonna have different characteristics of… And requirements of us, and risk on us, right, how we need to behave with them and interact with them, and the risks it poses to us. And there’s just probably some categories of investments where the risks and the requirements on us are too demanding and diminishing returns to even wanna get involved with it in the first place. And I was talking to someone the other day, and they were just mentioning a scenario like this, lots of kind of complex investments that they had a hard time understanding. And I kinda just thought, you know, if you’re involved with things that you’re probably not excited to talk about online or with your friends, like investments, you probably… It might be a good signal that you’re doing the ones you should be doing. [chuckle]

Matt Mulcock:
Yeah.

Ryan Isaac:
Just boring and slow for a long period of time. If you’re doing a lot of investments that you cannot wait to tell someone about, you might be in some danger zone, as Top Gun would put it. Which, by the way, the new Top Gun is absolutely…

Matt Mulcock:
I think I’m gonna go see it tomorrow.

Ryan Isaac:
Blasphemy here. It is better than the first one, and I can’t believe they pulled it off. Unbelievable. But anyway…

Matt Mulcock:
I think I’m gonna go see it this weekend.

Ryan Isaac:
Thanks for bringing that up, Matt. There’s just… There’s a lot out there, and at some point, we lack the time, resources, expertise, skill and appetite and ability to take on the risk to even wanna get involved with some of these things.

Matt Mulcock:
And just ’cause you heard someone made money in it, it doesn’t mean it’s the right investment for you.

Ryan Isaac:
Yeah. And, man, I’m just… A lot of times when I hear the… And it’s never like a curious question, like, “What are commodities? I hear about these but what are they and how do they function?” It’s always like, “Oh, we gotta get in. Like, I heard this thing and… ” It’s always panicky, it’s always fear-based, it’s always like urgent. Which probably tells you that the source you heard it from might not be… It might not have your educational best interest in mind, and probably has a sales agenda of some kind. Probably. And that reaction where you feel like you’re left out, panicking and scared and might be left behind, that might be a good indication that, don’t worry about it.

Matt Mulcock:
Yeah.

Ryan Isaac:
Like, it was the wrong place to start with, not curiosity, and… Anyway.

Matt Mulcock:
They’re probably misinformed, lying or trying to sell you something. It’s one of those three.

Ryan Isaac:
Yeah. Yeah, unfortunately, but that’s the financial industry, and there’s a lot of money to be made in selling stuff, so, there you go. Mattie, as always, man, you’re here week in and week out.

Matt Mulcock:
Love it.

Ryan Isaac:
You’re doing the thing. The people demand it and you’re here.

Matt Mulcock:
I don’t know about that. I don’t…

Ryan Isaac:
Fulfilling demands.

Matt Mulcock:
No one demands this at all from me.

[chuckle]

Ryan Isaac:
You put the man in demand. [laughter] Rabih, man, I love when you’re here and thank you for answering the call from two hours ago. I think you were leaving town or something, and you just showed up with a full educational CE webinar of amazing information.

Matt Mulcock:
Honestly the best. Rabih is just legend.

Ryan Isaac:
Seriously. Thank you, man.

Rabih Dimachki:
This has been great. This has been great. Looking forward for part two about crypto, and make sure you bring popcorn.

[laughter]

Matt Mulcock:
Yeah. Yes.

Ryan Isaac:
Make sure you bring popcorn. Yeah, at a future 60-day price. [laughter] All you listening, thank you always for being here, we really appreciate you being here. And if you have any questions, go to dentistadvisors.com, click the Book Free Consultation link and let’s have a chat. Matt and Rabih, have a great weekend, and everyone listening.

Matt Mulcock:
Thanks, Ryan. Thanks, Rabih.

Ryan Isaac:
Catch you next time…

Rabih Dimachki:
Thank you, guys.

Ryan Isaac:
In another episode of The Dentist Money Show. Take care now. Bye-bye.

Finance 101