Commodities? Inflation hedge

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banook
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Commodities? Inflation hedge

Post by banook »

Does a commodity fund like PCRIX make sense at this time? If so, at what AA? Or stick with TIPS? With much money having been injected into the economy as stimulus, and some basic products like gasoline, corn, and lumber rising in price - does it make sense to revisit commodities as part of an investment strategy? I cannot explain $7-8 a bushel corn based on supply or demand and have been perplexed by this, and perplexed by unprecedented large orders of it overseas. African swine flu aside - the amount ordered would finish many hogs and or other livestock. And, there is still a large supply of grain. I don't think this is simply just a "re-starting" the economy. I was not alive for the 1970s - I do not understand the prices of certain real consumer goods at the moment.
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Kenkat
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Re: Commodities? Inflation hedge

Post by Kenkat »

Commodities were popular here at one time but now they are mostly poorly regarded. There are a few idiots like me here that still hold them. I’ve had a small stake in PCRIX that I’ve held since 2004 and it is doing very well so far this year, perhaps as inflation has picked up, but you can go a long time without seeing a positive impact, so hold these only if you don’t mind some major underperformance. I’ve limited my stake to 3-5% of total portfolio, so the impact plus or minus is rather muted. It’s been a pretty rocky ride overall and they haven’t helped for a long time so go in with your expectations clear.
HyperCat
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Re: Commodities? Inflation hedge

Post by HyperCat »

The stock market inherently corrects for inflation, so I'm personally not doing anything to hedge against it other than continuing to buy the total market. My impression is that commodity prices are artificially high at the moment due solely to covid-induced supply chain disruptions, and nothing to do with inflation. Therefore, I'm expecting prices to come right back down once that's sorted out, and I don't plan on riding them down. Just my two cents.
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Re: Commodities? Inflation hedge

Post by learntoinvest123 »

I don't know about this commodity fund, but most commodity tracking assets use futures since they don't actually hold the commodity. Future tracking assets suffer from contango and backwardation due to the need to roll the futures forward. That means they track the underlying commodity inaccurately. See USO as an example which almost got wiped out when oil crashed.

Better to hold stocks of companies that supply these commodities, but these stocks are vulnerable to wild swings.
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watchnerd
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Re: Commodities? Inflation hedge

Post by watchnerd »

banook wrote: Sun May 09, 2021 3:31 pm Does a commodity fund like PCRIX make sense at this time? If so, at what AA? Or stick with TIPS?
Vanguard has a paper on the effectiveness of TIPS vs commodities when it comes to inflation.

It's good reading:

https://personal.vanguard.com/pdf/ISGCTIPS.pdf
Global stocks, IG/HY bonds, gold & digital assets at market weights 75% / 19% / 6% || LMP: TIPS ladder
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Re: Commodities? Inflation hedge

Post by NoRegret »

banook wrote: Sun May 09, 2021 3:31 pm Does a commodity fund like PCRIX make sense at this time? If so, at what AA? Or stick with TIPS? With much money having been injected into the economy as stimulus, and some basic products like gasoline, corn, and lumber rising in price - does it make sense to revisit commodities as part of an investment strategy? I cannot explain $7-8 a bushel corn based on supply or demand and have been perplexed by this, and perplexed by unprecedented large orders of it overseas. African swine flu aside - the amount ordered would finish many hogs and or other livestock. And, there is still a large supply of grain. I don't think this is simply just a "re-starting" the economy. I was not alive for the 1970s - I do not understand the prices of certain real consumer goods at the moment.
Commodities are not a buy and hold asset class but a new super cycle may have started. My preference is to own producer companies but contango may have recently crept in. Despite being a long time Pimco fan, I would choose PDBC over PCRIX.
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Astones
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Re: Commodities? Inflation hedge

Post by Astones »

Stocks are already inflation protected intrinsically.
Then I'd rather have a bond fund that is not currency hedged, than commodities, to face inflation.

Commodities have real return equal to zero, with the additional problem of having usually rather high volatility.

I don't consider commodities a good tool to stay protected against inflation.
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banook
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Re: Commodities? Inflation hedge

Post by banook »

watchnerd wrote: Sun May 09, 2021 5:48 pm
banook wrote: Sun May 09, 2021 3:31 pm Does a commodity fund like PCRIX make sense at this time? If so, at what AA? Or stick with TIPS?
Vanguard has a paper on the effectiveness of TIPS vs commodities when it comes to inflation.

It's good reading:

https://personal.vanguard.com/pdf/ISGCTIPS.pdf
This read was useful - thank you! I think for the moment we are ok with what we have based on this information. It seems if our net worth increases though, it might be prudent to consider short-term commodities investment - we already hold TIPS and equities.
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Re: Commodities? Inflation hedge

Post by nisiprius »

Have you looked at the actual behavior, inflation-adjusted, of the PIMCO Commodity Strategy Real Return fund, PCRIX, since inception? Here it is (blue), compared with the behavior of the Vanguard Inflation-protected Securities Fund, VIPSX (red).

Look particularly at 2008-2009 and at 2020. Although the issue here has nothing to do with inflation, it does underline just how much volatility PCRIX had. Personally, there's no way in the world I'd want that much volatility to get that little return.

While inflation is low and moderate--as it has been for decades--the behavior of a good inflation hedge ought to be moderate as well. Until inflation hits, it should sit quietly there, smooth, tame, and boring, and do nothing but crank out some modest positive real return. Do you honestly feel PCRIX has done that?

Source

Image

(And, no, if you backtest PCRIX in a portfolio, its imperfect correlation with stocks does not give you enough benefit to compensate for the lead weight of low return).
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Garco
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Re: Commodities? Inflation hedge

Post by Garco »

I'm not one to chase the hot areas. However, if commodities are viewed as a good inflation hedge there are different ways to get at it. For example, I have held FNARX (natural resources) and FSDPX (materials) for some time (years) in my IRA. They both have shown some life recently. But in the current environment rather than add to them I'm just more likely to hold onto them. Another natural resource company I've held is FCX (Freeport McMoRan).
Last edited by Garco on Sun May 09, 2021 9:45 pm, edited 1 time in total.
Topic Author
banook
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Re: Commodities? Inflation hedge

Post by banook »

nisiprius wrote: Sun May 09, 2021 9:12 pm Have you looked at the actual behavior, inflation-adjusted, of the PIMCO Commodity Strategy Real Return fund, PCRIX, since inception? Here it is (blue), compared with the behavior of the Vanguard Inflation-protected Securities Fund, VIPSX (red).

Look particularly at 2008-2009 and at 2020. Although the issue here has nothing to do with inflation, it does underline just how much volatility PCRIX had. Personally, there's no way in the world I'd want that much volatility to get that little return.

While inflation is low and moderate--as it has been for decades--the behavior of a good inflation hedge ought to be moderate as well. Until inflation hits, it should sit quietly there, smooth, tame, and boring, and do nothing but crank out some modest positive real return. Do you honestly feel PCRIX has done that?

Source

Image

(And, no, if you backtest PCRIX in a portfolio, its imperfect correlation with stocks does not give you enough benefit to compensate for the lead weight of low return).
+1 on this - thank you. I didn't know specifically about VIPSX, just TIPS. I also don't hold PCRIX at the moment - just hearing from older folks this recent bout smells more of 1970s (which I never lived through) than anything else. I only started investing in 2014, and lived in a country that didn't have as many issues during 2008-2009 (although from US friends living here, I heard of the very real pain). 2020 we made it through just fine, although it seems somewhat like we're still in it.
NiceUnparticularMan
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Re: Commodities? Inflation hedge

Post by NiceUnparticularMan »

So as that Vanguard article points out, there is expected inflation and unexpected inflation. Expected inflation is probably not something a normal stock/bond portfolio really needs to worry about. Unexpected inflation is not something we have seen much of recently on a medium/long-term net basis, but it could in fact be a serious problem for a normal stock/bond portfolio if it does show up again, particularly portfolios heavier on bonds (as one would expect), but potentially stocks too. As the paper reports, there just isn't a consistent relationship between stocks and unexpected inflation, but that means it is possible you could get a double-whammy effect with a normal stock/bond portfolio in an extended net unexpected inflation scenario.

As that article also points, if you are trying to use a small(ish) allocation to an asset class to provide portfolio-level protection against unexpected inflation, you would want that asset class to have a high "beta" to unexpected inflation. But on the principle there are no true free lunches, such an investment is likely to lag other risky investments significantly when there is little unexpected inflation. And in fact, you should expect any portfolio which includes such an asset class to look worse as a result, against an otherwise similar portfolio, in terms of returns adjusted for volatility over periods where there is little unexpected inflation.

In light of all this, what I have personally done is allocate 7% of our retirement portfolio to a Real Return ex-Natural Resource fund available in one of our 401Ks. That fund is designed to deal with inflation generally, and is 45% TIPS (NOT just short term), 35% global real estate (which in turn is about 55% U.S., 45% international), and 20% Bloomberg Roll Select Commodity Index (a version of their normal commodity index, BCOM, which was cited in the Vanguard paper, but that tries to mitigate contango). As the Vanguard paper suggests, the only part of this with much beta to unexpected inflation is going to be the 20% commodities part, and I have put all of about 1.4% of our portfolio into that investment.

Which is pretty wimpy of me and probably won't matter much one way or another. But from an academic perspective, I do like having an investment like that in the mix, and the TIPS and international real estate portions also checked off a couple boxes for me, so why not?

If you wanted to do something similar with commodities without using such a Real Return fund, you can use the iShares ETF CMDY. There have been some discussions here about it.

Or, just don't do it at all, and say stick with TIPS (maybe short-term), or indeed just stocks, for unexpected inflation protection.
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Re: Commodities? Inflation hedge

Post by firebirdparts »

What bugs me about this is that commodities are not a thing. There's no reason to think that iron, hogs, gold, palladium, and oil all face the same supply and demand events. It's not reasonable.

There are too many non-economical influences on these industries.
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Re: Commodities? Inflation hedge

Post by james22 »

This is a product [VCMDX] that’s designed for sophisticated investors who want further diversification beyond stocks, bonds, and cash. Stocks and bonds tend to be uncorrelated. However, if you have a meaningful amount of money, or you have a near-term spending need, it can help to have an additional diversification benefit. And then, two, this is really geared for folks who have a real concern about inflation.

So it’s really not for everyone. It is going to be for folks who meet either of those criteria: “I want a lot more diversification, or I have a real concern about inflation.


https://investornews.vanguard/discoveri ... dity-fund/

I want more diversification and I have some concern about inflation.

5% VCMDX.
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Re: Commodities? Inflation hedge

Post by Valuethinker »

banook wrote: Sun May 09, 2021 9:39 pm
nisiprius wrote: Sun May 09, 2021 9:12 pm Have you looked at the actual behavior, inflation-adjusted, of the PIMCO Commodity Strategy Real Return fund, PCRIX, since inception? Here it is (blue), compared with the behavior of the Vanguard Inflation-protected Securities Fund, VIPSX (red).

Look particularly at 2008-2009 and at 2020. Although the issue here has nothing to do with inflation, it does underline just how much volatility PCRIX had. Personally, there's no way in the world I'd want that much volatility to get that little return.

While inflation is low and moderate--as it has been for decades--the behavior of a good inflation hedge ought to be moderate as well. Until inflation hits, it should sit quietly there, smooth, tame, and boring, and do nothing but crank out some modest positive real return. Do you honestly feel PCRIX has done that?

Source

Image

(And, no, if you backtest PCRIX in a portfolio, its imperfect correlation with stocks does not give you enough benefit to compensate for the lead weight of low return).
+1 on this - thank you. I didn't know specifically about VIPSX, just TIPS. I also don't hold PCRIX at the moment - just hearing from older folks this recent bout smells more of 1970s (which I never lived through) than anything else. I only started investing in 2014, and lived in a country that didn't have as many issues during 2008-2009 (although from US friends living here, I heard of the very real pain). 2020 we made it through just fine, although it seems somewhat like we're still in it.
The difference in the 1970s was trade unionization was much greater. Almost all public sector workers, and many private sector workers (GM was probably the country's biggest private employer then, and it owned many of its parts suppliers, too), were on CPI indexed contracts. Thus rises in input costs were passed through to consumers which led to wage rises which led to rises in input costs ...

Although US companies are reporting labour shortgages, it's an open question whether that will persist once everything is fully open again - how big the wage increases will be. There are depressing factors - look at what Amazon is doing in terms of warehouse automation for example. Even if there is onshoring of some manufacture, it's still possible to offshore many service jobs, etc. (Perhaps another factor will be large companies will increasingly allow Work From Home situations but at lower salaries, as well as set up operations in parts of the country where housing is cheaper and thus the general level of wages is lower).

There were also some "supply side shocks". Notably, the 2 oil price shocks (1973 and 1979) but also the failure of the USSR wheat harvest (1974?) which sent them scurrying on to world markets to buy up available supplies to prevent starvation and internal unrest. Other commodity price booms as well.

Covid-19 yes we are still in it. The Far East is largely out of it due to more extreme measures at infection control-- Australia, New Zealand, China, Taiwan, Singapore (but also Vietnam and others). But Europe & USA? Yes still in it - although fingers crossed that mass vaccination lets us unlock in a timely fashion.
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Re: Commodities? Inflation hedge

Post by Robot Monster »

HyperCat wrote: Sun May 09, 2021 4:33 pm The stock market inherently corrects for inflation, so I'm personally not doing anything to hedge against it other than continuing to buy the total market.
If you have a decent allocation to stocks, seems you don't need any TIPS. (See Vineviz's recommendation below.) However, because the stock market relies so heavily on TINA, stocks might get hurt if higher inflation causes the Fed to hike interest rates. Not suggesting you change your allocation, just to be clear.

***

Speaking generally about the amount of TIPS one might have in one's portfolio, Vineviz created a "very rough rule of thumb, in table form":

Code: Select all

Stocks	LTT	TIPS	STIG
100%	0%	0%	0%
90%	10%	0%	0%
80%	20%	0%	0%
70%	20%	10%	0%
60%	20%	20%	0%
50%	20%	30%	0%
40%	10%	40%	10%
30%	0%	50%	20%
LTT = Long-term Treasuries
TIPS = Broad TIPS fund (or Series I Savings Bonds or individual TIPS ladder)
STIG = Short-term investment grade corporate bond fund
source
heyyou
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Re: Commodities? Inflation hedge

Post by heyyou »

PCRIX was designed to buffer the inflation of the 1980s which was a major threat to those with no-COLA pensions.
Having recently retired with a pension, I bought into PCRIX near the early peak in the mid-2000s, so my shares only went down with those later fluctuations.
PCRIX was marketed as having several different sources of income implying that it would have good performance in various economic scenarios. What it had was over-popular asset bloat that allowed knowledgeable commodities traders to front run PCRIX's massive expiring futures trades. PIMCO made money on AUM fees, but the shareholders did not have any price gains.

My lesson was there will be unforeseen risks that will counteract what was intended as a specialized buffer to known risks. The big picture is you only get the reward from taking the risks, there are no tricks for magically getting full reward with partial, supposedly buffered exposure.

Larry Swedroe publicly touted the buying of PCRIX for a long period, then did not ever later suggest that it was time to exit. I doubt that his AUM clientele were kept in it.
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banook
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Re: Commodities? Inflation hedge

Post by banook »

heyyou wrote: Mon May 10, 2021 1:13 pm PCRIX was designed to buffer the inflation of the 1980s which was a major threat to those with no-COLA pensions.
Having recently retired with a pension, I bought into PCRIX near the early peak in the mid-2000s, so my shares only went down with those later fluctuations.
PCRIX was marketed as having several different sources of income implying that it would have good performance in various economic scenarios. What it had was over-popular asset bloat that allowed knowledgeable commodities traders to front run PCRIX's massive expiring futures trades. PIMCO made money on AUM fees, but the shareholders did not have any price gains.

My lesson was there will be unforeseen risks that will counteract what was intended as a specialized buffer to known risks. The big picture is you only get the reward from taking the risks, there are no tricks for magically getting full reward with partial, supposedly buffered exposure.

Larry Swedroe publicly touted the buying of PCRIX for a long period, then did not ever later suggest that it was time to exit. I doubt that his AUM clientele were kept in it.

There were no-COLA pensions????!!!! Wow, I really had no idea about these - good historical context with regard to PCRIX. Yes, I think we've got roughly the Vineviz allocation of 70:20:10 Stocks:LTT:TIPS and some tacked on exposure to Global real estate with REITs.
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Re: Commodities? Inflation hedge

Post by secondopinion »

Buy food that last on the shelf a long time; at least if you cannot sell it, then you can eat it.

I do not buy commodities I cannot use. If I use it, then it will fight inflation better because it is something I actually buy.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
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Re: Commodities? Inflation hedge

Post by Robot Monster »

Just for the record about commodities, this is what Rick Ferri had this to say. Boldface is mine.
A portfolio is like a birthday cake:

Your allocation to stocks, bonds, and cash are the layers of the cake;
Your allocation to International stocks vs. US stocks, and corporate bond vs governments is the icing on the cake;
Small-value and other factor tilts are decorations on top of the icing;
Commodities, bit-coin, and other alternatives are bright glowing candles - soon to be blown out and forgotten.

Rick Ferri
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Thesaints
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Re: Commodities? Inflation hedge

Post by Thesaints »

Commodities are not that godd of a hedge against inflation. In modern, developed economies, the primary driver of the cost of many goods/services is labor.
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Re: Commodities? Inflation hedge

Post by james22 »

Robot Monster wrote: Tue May 11, 2021 3:52 pm Just for the record about commodities, this is what Rick Ferri had this to say. Boldface is mine.
A portfolio is like a birthday cake:

Your allocation to stocks, bonds, and cash are the layers of the cake;
Your allocation to International stocks vs. US stocks, and corporate bond vs governments is the icing on the cake;
Small-value and other factor tilts are decorations on top of the icing;
Commodities, bit-coin, and other alternatives are bright glowing candles - soon to be blown out and forgotten.

Rick Ferri
link
Yet here we are.
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Kenkat
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Re: Commodities? Inflation hedge

Post by Kenkat »

I know it’s less than 5 full months, but PCRIX moved to the top of my portfolio in terms of YTD return yesterday. Haven’t seen that for a very long time, if ever.
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Re: Commodities? Inflation hedge

Post by Robot Monster »

james22 wrote: Wed May 12, 2021 9:39 am
Robot Monster wrote: Tue May 11, 2021 3:52 pm Just for the record about commodities, this is what Rick Ferri had this to say. Boldface is mine.
A portfolio is like a birthday cake:

Your allocation to stocks, bonds, and cash are the layers of the cake;
Your allocation to International stocks vs. US stocks, and corporate bond vs governments is the icing on the cake;
Small-value and other factor tilts are decorations on top of the icing;
Commodities, bit-coin, and other alternatives are bright glowing candles - soon to be blown out and forgotten.

Rick Ferri
link
Yet here we are.
There is time yet for birthday boy to be blowing!

"Cathie Wood...[is] calling for a collapse in commodities which would then quell inflation..." source
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Re: Commodities? Inflation hedge

Post by Horton »

If you were concerned about inflation, you should have adjusted your portfolio 6-12 months ago. Now, everyone is supposedly worried about inflation, so it’s probably the wrong time to make adjustments (unless you think inflation is going to be worse than the market is predicting as of today).
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banook
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Re: Commodities? Inflation hedge

Post by banook »

Horton wrote: Wed May 12, 2021 1:52 pm If you were concerned about inflation, you should have adjusted your portfolio 6-12 months ago. Now, everyone is supposedly worried about inflation, so it’s probably the wrong time to make adjustments (unless you think inflation is going to be worse than the market is predicting as of today).
Been worried about it for awhile - however, I don't know the difference between long-term and short-term inflation, having really only seen weak inflation in my life-time. The posters who are more experienced than me provided good information on both types. It helped. Anything to add beyond what has already been posted to those of us that are worried and less experienced than you? It would be great if you can say more on how you deal with it and it's different than the other posts.
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Re: Commodities? Inflation hedge

Post by Horton »

banook wrote: Wed May 12, 2021 1:59 pm
Horton wrote: Wed May 12, 2021 1:52 pm If you were concerned about inflation, you should have adjusted your portfolio 6-12 months ago. Now, everyone is supposedly worried about inflation, so it’s probably the wrong time to make adjustments (unless you think inflation is going to be worse than the market is predicting as of today).
Been worried about it for awhile - however, I don't know the difference between long-term and short-term inflation, having really only seen weak inflation in my life-time. The posters who are more experienced than me provided good information on both types. It helped. Anything to add beyond what has already been posted to those of us that are worried and less experienced than you? It would be great if you can say more on how you deal with it and it's different than the other posts.
I don’t know what inflation will be in the future, nor does anyone else. My biggest asset is still my human capital and I spend less than I earn; I’m hoping these two things will get me to retirement with enough.

If I were to start over all again at age 23, I would simply put all my money in target date funds and call it a day. Your saving and spending rates matter much more in the long-run than small tweaks to your asset allocation based on the concern or guru of the day. In fact, I recently moved my entire 401k into a target date fund and I’ve toyed with the idea of moving our other tax-advantaged accounts into a TDF.
80% global equities (faith-based tilt) + 20% TIPS (LDI)
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Re: Commodities? Inflation hedge

Post by corp_sharecropper »

I hold a mix of utilities, materials/nat resources producer sectors, US/Int REITS, commodity trend & carry, EM IG/HY bonds, metals/mining equities, TIPS, and of course straight gold/silver/crypto. All have done very well lately, especially commodity trend/carry and materials/nat resources. Between all these I think it's the best that I can personally do to survive/thrive in a variety of inflationary environments within the limits of publicly addressable markets as a retail investor.

After spending way too much time researching, I've come to the conclusion that there's no single asset that's a silver bullet for inflation. Additionally, I've come to the realization that there's absolutely no consensus on what causes inflation (meaning there is likely different causes and types) among the smartest minds on this planet but there does seem to be consensus that "printing too much money" is not what causes or that it's far more complicated than this trope that everyone heard from their dad/grandpa at some point while growing up.
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