About a year ago, I tweeted about how the 10-year treasury yield is slowly increasing because of high inflation expectations. Well, the US inflation surged to a new 40-year high of 8.5% in March and that 10-year treasury yield is now at 3.128%.

The S&P500, Dow Jones, Nasdaq, Bitcoin, everything is down from their all-time highs. Now I know I said Bitcoin is an inflationary hedge and yet Bitcoin is currently down 50% from its ATH but I wasn't wrong about commodities.

So in this issue, let's dive deep into commodities and should you have exposure to them 👇

What are commodities?

• Commodities are economical goods that have full fungibility - meaning the market treats them the same with no regard to who produces them. There's little differentiation from one producer to that of another
• Commodities can be classified into 4 main types:
  • Energy - Natural Gas, Crude Oil, etc.
  • Precious Metals - Gold, Silver, Platinum, etc.
  • Agriculture - Grains, Livestock, etc.
  • Industrial Metals - Copper, Aluminium, Zinc, etc

Investing in commodities

• It's all about supply and demand
• Almost by definition, if inflation is high, it means that commodities prices are rising. This is because when the spending and incomes grow faster than the production of goods: prices rise!
• There are many ways to invest in commodities like buying individual stocks in companies that produce them but in this issue, we will be focusing on ETFs and mutual funds because they offer you a broad exposure to different types of commodities

Historical performance

• Let's have a look at the performance of the Bloomberg Commodity Index vs the S&P 500

• As expected, the commodity market has outperformed the equity market. While the S&P 500 was down 14%, the commodity index was up 35%!
• But before you go all-in commodities, you should know that their performance over the past decades has been TERRIBLE!
• Since its inception in 2006, the Bloomberg commodity index had a cumulative return of -21% when compared to the 350% returned by S&P500
• However, it's a bit unfair to compare a time period where the stock market had done exceptionally well and commodities had done extremely poorly
• If you consider the 2000-2010 period, commodities actually beat the S&P 500. But overall, S&P 500 still gave a better-annualized return
• But we are talking about investing during a high inflation environment remember?

So should you invest in commodities?

• Based on this paper by Washington Trust Bank, commodity prices are positively correlated with inflation whereas stocks have a slightly negative correlation with inflation
• Even though commodities have had a rough run over the past few years, if you look long term, having exposure to them can definitely protect against rising inflation and declining purchasing power over time

While nobody has a crystal ball, I believe that with the current macro environment, the best thing to do now is to protect your purchasing power and invest in yourself

Before you go...

• Check out issue #71 where we talked about the fertilizer crisis no one is talking about🌾
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• Have any friends or colleagues that would be interested in this issue? Forward them this email!
• You could also read past issues here

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