Do commodities protect your portfolio from inflation?
We're all hearing a lot about potential inflation these days (I say potential because it hasn't shown up yet, except for at the gas pump). But all of Uncle Sam's stimulus, the argument goes, will eventually lead to inflation or hyperinflation.
Leaving aside the debate over when and how much inflation will appear on the horizon, let's look at how commodities (as measured by the Morningstar Long-Only Commodity Index) have reacted to inflation spikes since 1980, courtesy of one of my favorite books, the Ibbotson Stocks, Bonds, Bills, and Inflation Yearbook (2009 edition).
Top Five Years of Percent Change in Inflation
Year Large-caps Commodities Change in Inflation Rate
1987 5.3% 22.1% 290.3%
2004 10.9% 17.6% 73.2%
1999 21.0% 31.1% 66.5%
2007 5.5% 31.8% 60.6%
2002 -22.1% 34.0% 53.2%
On the flip side, commodities declined in four of the five years that saw the biggest decreases in the rate of inflation.
So it seems that commodities, as a group, do indeed provide some increasing inflation protection, though you'll likely give some of it back during times of decreasing inflation (disinflation).
However, individual commodities are trickier. Gold has done well over the past several years, but its longer-term history is not so impressive. It hit $850 an ounce in 1980, and began a long, slow decline to about $250 an ounce in 1999, even though inflation averaged around 4% a year over that period.