6. Commodities as inflation Hedge

Long Term Vs. Short Term Reactions

Another complication in commodities is time frames. The reaction of commodities to inflation is often short-lived. During peak periods of inflation, commodity prices can explode, but once inflation begins to subside, commodities could fall hard and fast. And when the threat from inflation subsides, commodity prices can sink, and go quiet for a very long period of time.

The problem with this arrangement is that there’s acute inflation – the type commodities react best to – and then there’s the slow, gradual type that is always with us. During the past 30 years for example, inflation has averaged about 3% per year. During most of those years commodities hardly reacted to gradual rising prices. Gold, in particular, was flat to declining during most of the 1980s, 1990s, and even the early 2000s. There was inflation for sure, but not the type that gold reacts to.

Leave a Reply

Your email address will not be published. Required fields are marked *