Granite Investment Advisors – Are Commodities an Appropriate Inflation Hedge?

“Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” – John Adams

The above quote does a wonderful job of highlighting what we believe to be one of the biggest fallacies investors are currently being bombarded with, namely the investment case for commodities or the reason to keep them as a separate asset class. We often hear from Wall Street strategists, analysts, the media, and some of you, our clients, wondering why we do not invest in commodities as a way to protect our portfolios from the detrimental effects of inflation. While all commodities are believed to offer protection against inflation, gold is considered to be a natural hedge. Commodity prices peaked in 2011 and have declined ever since, leading some to believe that now might be a good time to establish positions. We are of the school of thought that inflation will accelerate due to various global Central Banks’ policies and are always looking for bargains. As such, we decided to look into this in more depth. Our goal was to determine if the perceived inflation protection offered by commodities held true based on history, and if not, what investments can protect against inflation?

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