Stock prices are said to climb a wall of worry. These days, that worry is inflation.
Igor Vasilachi at Verdad is out with a new piece detailing how investors can best position themselves for an inflationary environment.
The chart below shows inflation beta, or how sensitive an asset class is to inflation. For example, with an inflation beta of 4, the regression would suggest that a 1% increase in inflation would lead to a 4% increase in commodities over a given period.
Commodities and gold have the highest inflation beta in regressions on monthly data as shown above – and appear to be the only two assets whose real returns in periods of rising inflation were higher than over the full period.
You’ve probably noticed that commodities are on fire. PDBC, the largest commodity ETF by assets, is up 18% YTD.
Crude oil went negative last year. It’s now over $60 a barrel. Lumber prices are up 140% over the last year. Copper futures contracts got down to ~$2 last year. They’re now over $4. Corn, soybeans, and wheat prices are all way up.
Commodity prices sure do seem to be pointing at higher consumer prices.
The only commodity not working, paradoxically, is the one that is often most linked to the price of inflation. Gold is flat over the last year and is 18% off its high.
Who to believe? Gold, or the rest of the commodity complex?
Maybe neither. Other forces drive prices besides just inflation. With the economy shutting down and now on the verge of reopening, this could simply be a supply/demand mismatch that will work itself out.
I’ll give the final word to Vasilachi (emphasis mine):
Commodities and gold are excessively volatile, have historically generated considerable drawdowns and are less correlated with inflation (only 25% of their long-term returns variability is explained by changes in inflation).