There is a glitch with commodities right now in that prices have already risen substantially at a time of historically low inflation. In fact, at times since 2000 we’ve even flirted with deflation – and yet still commodities continued to rise.
With oil hovering around $100 a barrel and gold at nearly $1,700 an ounce, you have to wonder if the absence of inflation has anything to do with running them up to that level. As absurd as it sounds on the surface, is it possible that a surge of inflation might be negative for commodities in some way that is not entirely obvious right now?
The other concern is that these two bellwether commodities have experienced incredible price increases in the past decade. Would that somehow reduce their effectiveness as inflation hedges going forward?
Oil and gold were two of the best-performing assets during the inflation-plagued 1970s, but the whole dynamic was very different. Gold started out the decade at $35 an ounce, while oil was less than $3 a barrel. As inflation increased during the decade those commodities had plenty of room to run. Will that be the case now?