Why do commodities perform well in inflation?
Because commodities are “real assets,” they tend to react to changing economic fundamentals in different ways than stocks and bonds, which are “financial assets.” For example, commodities are one of the few asset classes that tend to benefit from rising inflation.
Why invest in commodities. Commodities may minimize portfolio volatility. Weather, politics or global production can affect commodities returns, so the historical correlation of commodities to traditional assets is low. As a result, the returns from commodities may help reduce volatility in a diversified portfolio.
Commodities Are Important for Growth and Development, and Pulses Can Play a Crucial Role. The commodities sector is very important for the economy of developing countries. More than 100 developing countries depend on primary commodities, and particularly agricultural commodities, for their export earnings.
While stocks in general have been declining, many commodities have seen their values sharply increasing. Prices from oil and metals to grains have soared amid the disruptions caused by market uncertainty and economic sanctions stemming from the conflict.
The first sustained period of inflation for decades has put commodity exposure in investors' minds as commodities are associated with inflation hedging. Studies also show that an increased allocation to commodities provides high returns when stock and bond returns are at their weakest.
Commodities have outperformed all major asset classes during the 9 Fed hikes since 1972. Commodity stocks are rallying and they're a great way to inflation-proof your portfolio. Inflation hit a 40-year high at the end of 2021, and in January, consumer prices rose to the highest level since 1982.
Prices for raw materials like oil, metals and agricultural products usually increase along with inflation, so they can be a good hedge against it.
Inflation is the upward movement in the average prices of general goods and commodities. A rise in inflation means an increase in the overall cost of living. Inflation affects your ability to purchase goods and services, making them costlier over time. For example, 10 years back, a litre of milk would cost Rs15.
Commodity prices are believed to be a leading indicator of inflation through two basic channels. Leading indicators often exhibit measurable economic changes before the economy as a whole does. One theory suggests commodity prices respond quickly to general economic shocks such as increases in demand.
The chart below shows the relationship between interest rates and commodities, illustrating that when interest rates increase, commodities prices decrease; when interest rates decrease, commodities prices increase. That is because of the cost of carry—the costs associated with holding inventory.
