Are Commodities an Inflation Refuge?

Chart(s) of the Week: Are Commodities an Inflation Refuge?

November 7, 2022

With inflation still running around 8% year-over-year, protecting portfolios against rising prices is top of mind. Unfortunately, many so-called inflation hedges have let investors down. Notably, both gold (-10%) and bitcoin (-55%)—also known as “digital gold”—have failed to live up to their overstated reputations this year.

But how about the broader basket of commodities, which includes precious and industrial metals, livestock, oil, natural gas, coffee, cotton, sugar, grains, soybeans, etc.?

Commodities initially provided some solid inflation protection for investors this year. Prices (measured by the Bloomberg Commodity Index) gained 22% in the first half of 2022. And they about doubled from their initial pandemic lows (April 2020).

That all sounds pretty good… However, since their June high, commodity prices are down about 17% even as reported inflation remains elevated.

A chart showing the change in value of the Bloomberg Commodity Index from December 2019 through October 2022.
Note: Chart shows weekly index level for the Bloomberg Commodity Index from December 2019 through October 2022. Source: Bloomberg.

Viewed through a longer lens, commodities have simply not been a good hedge against inflation over time.

In 1991, the Bloomberg Commodity index was trading around 100. It’s been a wild ride since then, but the index is still, 30-some years later, trading around 100, meaning that overall prices have gone nowhere.

Commodities tend to be uncorrelated to stocks or bonds. This means they move to their own beat and can provide periods of opportunity for investors if you can time it right—but their long-term returns leave a lot to be desired.

No Long-Term Inflation Protection from Commodities
Note: Chart shows monthly index level for the Bloomberg Commodity Index from January 1991 through October 2022 as well as monthly changes to the inflation rate (using a starting value of 100 and returns of the IA SBBI U.S. Inflation index) over the same period. Sources: Bloomberg, Morningstar.

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