Inflation bubbles tend to increase commodity prices and lower the value of stock and bond yields. This is why several raw materials act as efficient inflationary hedges.
Commodity prices also rise when inflation is driven by economic growth, and can preserve wealth when Central Bank credibility declines.
Investors in the United States are weary of inflation because of large corporate profits, budget deficits and possible inflationary policies following the next presidential elections.
According to the financial institution Goldman Sachs, raw materials or “commodities” have proven to have the ability to be hedges against inflation, which makes them crucial equilibrium for bonds and stocks when prices and wages rise.
The Power of Raw Materials
Goldman Sachs’ analysis confirms how raw materials protect the value of investments against inflation shocks, which generally decrease bond and stock yields due to rising interest rates caused by inflation.
Likewise, raw materials function as a hedge against the fall in stock returns when rising prices cause the GDP’s growth to slow down.
According to the study, which is based on the historical analysis of five inflationary periods that occurred during the last 50 years, a surprise 1 percentage point rise in inflation in the US has led, on average, to a 7% increase in real (inflation-adjusted) returns on commodities, while the same event has caused stocks and bonds to decrease in value by 3% and 4%, on average, respectively.
Upside Inflation Surprises Tend to Boost Real Returns for Commodities, and to Lower Returns for Equities and Bonds (1 of 2)
Impact of 1 Percentage Point Increase in Inflation on
Real Returns of Various Commodities
A continuación citamos algunos ejemplos de cómo las materias primas actúan como escudos ante la inflación:
Below we cite some examples of how the raw Materials act like shields against inflation:
Energy
Energy has generated high returns when inflation is on the rise. This is because it responds to both supply and demand shocks. Refined oil and natural gas’ products have proven to be good hedges against inflation.
Agriculture and Livestock
Agriculture and livestock are also hedges against inflation. Agricultural prices rise in response to negative energy supply shocks and positive demand shocks.
Industrial Metals
Industrial metals, such as copper and aluminum, offer protection against demand-driven inflation, especially at the end of economic cycles when inflation risks are greatest.
Gold
Gold can offer protection against stock market crashes, trade wars, financial stability , capital controls, and even in the face of uncertainty on how the Federal Reserve will change as a result of a new administration.
That is why the golden metal stands out as the best coverage against inflation and geopolitical risks. In that sense, Goldman Sachs Research predicts that Gold’s price will reach US$2,700 per ounce by the end of 2024, which is equivalent to a projected growth of 16% during the second half of 2024, mainly due to the strong demand for gold by the central banks of emerging countries..
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