Commodities as Inflation Protection

Posted: 9 May 2013

See all articles by Andrew Marks

Andrew Marks

The Investment Research Foundation

George Crawford

The Investment Research Foundation

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School

Date Written: May 8, 2013

Abstract

Inflation degrades the function of the U.S. dollar as a storehouse of value. The goods and services which constitute the cost of living become more expensive in dollar terms. Commodities, and gold in particular, are often recommended to hedge that risk. Our work casts that popular advice into doubt, showing that inflation hedging with commodities is difficult, risky, and ultimately unreliable. Buy and hold strategies are impractical for many, and inflation hedging with commodities requires bold and successful management, together perhaps with good luck. Examining fifty-three years of spot prices for forty-five commodities and fourteen commodity aggregate indices, we find that owning certain things – specific commodities – rather than dollars would have been a better storehouse of value in the inflationary 1970s and in the brief period of high inflation from 1989-90. However, various commodities performed very differently in different periods, and some of the best in one period proved to be the worst in another. A basket of commodities to protect against inflation would be difficult to construct and in result. Furthermore, the precious metals, while often cited as inflation hedges, carry significant timing risks. Finally, a diversified basket of energy commodities has performed well under historical inflation, but carries its own risks.

Keywords: inflation, gold, commodities, hedging, volatility, spot prices, energy, metals, silver, CPI

JEL Classification: G10, G11, G23, E31

Suggested Citation

Marks, Andrew and Crawford, George and Liew, Jim Kyung-Soo, Commodities as Inflation Protection (May 8, 2013). Available at SSRN: https://ssrn.com/abstract=2262475 or http://dx.doi.org/10.2139/ssrn.2262475

Andrew Marks (Contact Author)

The Investment Research Foundation ( email )

547 West 27th Street, Suite 210
New York, NY New York 10001
United States

George Crawford

The Investment Research Foundation ( email )

547 West 27th Street, Suite 210
New York, NY New York 10001
United States

HOME PAGE: http://www.investresearch.org

Jim Kyung-Soo Liew

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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