Can Commodities Hedge Against The Record 40-Year Inflation?

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Contributor, Benzinga
February 14, 2022

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While the World is focused on the recent stock market dip, commodities were recently propelled to a 10-year high due to the recent inflationary surge. The commodity-price increase hasn’t seen a surge this big since the global financial crisis. What does this mean for investors? 

“The best place to be right now, especially due to the Fed pivot, is commodities.” Jeff Currie, global head of commodities research at Goldman Sachs, told Bloomberg. “This is the beginning of a commodity supercycle that’s likely to go on not only years but for decades.”

Commodities have often been trotted out as extraordinarily powerful inflationary hedges for investors. And for good reason. Commodity prices have historically remained strong and consistent throughout inflationary times. According to Vanguard researcher Sue Wang, Ph.D., historical data suggests that a 1% rise in unexpected inflation produces a 7% to 9% rise in commodities over the last decade. Unlike stocks, which produce a 2% to 9% decline under the same conditions.

Historically, when inflation increases, the price of commodities usually does as well. That’s because commodities are often used to produce goods and services, which go up when there is inflationary pressure.

We‘ve seen this pattern in the last year or so when commodities prices have increased across the board along with consumer prices. Cotton is up, gasoline surged, and extra virgin olive oil soared more than 200%. 

Due to the rising costs of raw goods, businesses everywhere are struggling. Analysts at rating firm S&P Global said retailers and restaurants especially are facing “some difficulties.” The supply chain disruption due to the recent health crisis hasn’t helped.

According to the Wall Street Journal, “manufacturers’ profit margins are shrinking because of higher costs for raw materials. Households are paying more for gas, groceries, and some restaurant bills, curbing their ability to spend elsewhere. In poorer countries, some are going without basic needs entirely.”

As a result, commodity prices could be pushed higher in the future. But investors should consider that this economic pressure is prompting the Feds to take action. The Feds plan to stop the stimulus and raise interest rates as soon as March of this year. And whether this could drive commodities up or down remains uncertain.

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Blue-chip artworks have appreciated 23.2% on average when inflation is at least 3%. It has outpaced the S&P 500 by 164% from 1995 to 2021. And WSJ recently called art “among the hottest markets on earth.” And now, investors have the opportunity to invest in this overlooked alternate asset alongside the ultra-wealthy with Masterworks.  There are more than 300,000 members on the Masterworks art investment platform; signup is required for investors.

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