Besides being implemented as an instrument for diversification, commodities can be used as a hedge against inflation, accordning to several academic studies*. When many other asset classes descrease in price due to high inflation, commodities such as oil are likely to rise in price.

Why consider inflation?

The ultimate objective of investors is to preserve the real purchasing power of your investments. For that reason, inflation must be considered. Ideally, portfolio assets exhibit a positive relationship to inflation. However, many traditional assets such as stocks and bonds are vulnerable to high inflation and represent a poor inflation hedge.

Correlation between stocks and commodities

Commodities are often negativly correlated to both stocks and bonds. So in other words, when inflations start to rise, commodities goes up in price while stocks and bonds go down in price. Therefore, it’s usually a good idea to diversify your portfolio with commodities.

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*Examples: “Robert J. Greer, “Conservative Commodities: A Key Inflation Hedge”, Journal of Portfolio Management (1978), pp. 26-29.