A Study of How Commodities Perform During Inflation

The Federal Reserve’s ten rate hikes since March of 2022 have helped ease inflation in the US, but we’re not there yet. At a CPI of 4% year-over-year and core inflation that’s even higher, we’re still not at the 2% target.

This might not seem like a problem. After all, if ten rate hikes got us this far down from our peak of 9.1% in June of 2022, then a few more hikes should get us the rest of the way. In truth, the rest of the battle will likely prove difficult. Why? Because companies are still charging more for goods. Consider that groceries increased 8.2% year-over-year last month.

As one global strategist at Société Générale remarked, “Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins.” The research supports this statement. Reporting from the New York Times shows that the average company in the S&P 500 has increased its net profit margin since the end of 2022. Between the pandemic and the war in Ukraine, these companies have many external factors to point to when justifying these increases. For weary consumers, these increases look more like opportunistic moves that will bolster the bottom line.

For investors, the problem is just as vexing. Inflation, while improving, is unlikely to return to the 2% level because rising prices have done little to dissuade consumers from buying. The question is: where can investors allocate more of their portfolio to protect themselves against inflation that might last longer than they can remain solvent?

Fortunately, a few researchers have attempted to answer this question. A paper, The Best Strategies for Inflationary Times, drafted by active investment company the Man Group and a Duke University academic, takes an empirical approach to this timely inquiry.

The group analyzed passive and active strategies among various asset classes during the last 95 years. Their work focused on the US, UK, and Japanese markets. The researchers identified eight periods of rising inflation – defined as a 5% acceleration year-over-year – in the US. During these eight periods, the group examined the performance of equities, commodities, real estate, and fixed income.

They discovered that during inflation commodities have “a perfect track record of generating positive real returns” and generated an average annualized +14% real return.

Gold was part of the commodity group that they analyzed. Specifically, the metal generated an annualized real rate of return of 13% during inflationary periods in the US. This performance even outpaced other commodities like agricultural goods including wheat, corn, soybeans, sugar, cocoa, cotton, coffee, and livestock. Gold also outperformed equities, TIPS, real estate, 2-year Treasuries, 10-year Treasuries, 30-year Treasuries, high-yield fixed income, and consumer durables.

What makes this finding so valuable for investors is that it covers such a range of periods and such a diverse group of assets. Moreover, the research shows that, unlike many other assets, gold still largely held its value even when inflation was not present.

Now is the time for investors to benefit from research like this as the fight to get back to 2% drags on and threatens to be long.