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A central and time-old problem in finance is the erosion of the value of money with the passage of time. Related to this issue, and within the context of portfolio management, is the question of which asset classes can effectively protect investors against inflation. Commodities are one such asset class, offering a rate of return that is related to the inflation rate (Greer 2000). Commodities are positively correlated with inflation and therefore offset the erosion of value by increasing in value in times of heightened inflation (Conover et al. 2010; Arnold and Auer 2015; Levine et al. 2018). Another important characteristic is that commodities have been available and readily accessible to investors throughout history, unlike modern assets such as stocks, bonds, or futures.
The inflation-hedging capacity of commodities has been widely studied. Numerous studies document the inflation-hedging properties of both individual commodities, such as gold, silver, energy, or timber (Fulli-Lemaire 2012; Bampinas and Panagiotidis 2015; Salisu, Ndako, and Oloko 2019; Zhang et al. 2011) and aggregate commodity baskets (Crawford, Liew, and Marks 2013; Fulli-Lemaire 2012; Zaremba, Umar, and Mikutowski 2019). Such studies frequently rely on data going back just a few decades—although some have used data going back to the 19th century (Bampinas and Panagiotidis 2015). Mahlstedt and Zagst (2016) demonstrate that inflation-hedging properties largely depend on long-run changes in the economy’s state.
What emerges from the literature is that commodities, to varying degrees, offer protection against inflation and that their inflation-hedging capacity varies over time. Nonetheless, existing studies rely on limited study periods and seldom go beyond individual countries or commodity groups. Meanwhile, neither commodity behavior nor the character of national economies is static. Multidecade commodity cycles and structural changes in economies challenge the long-run stability of the commodity-inflation relationship. Taking energy commodities as an example, it is true that these have been shown to serve as a solid inflation hedge (see, for instance, Fulli-Lemaire 2012). However, the role of oil in a modern service-based economy may be completely different in the forthcoming decades compared to its role in the 20th century. Furthermore, other energy sources may potentially replace oil’s dominant position, just as oil and gas displaced coal.
These long-run changes require a truly broad look at the inflation-hedging properties of commodities. Consequently,...