Finance Commodities Commodities are the raw metals, materials and industrial goods used to create the products which we buy every day – minerals and metals, lumber, agricultural goods, crude oil and many more – the starting “ingredients” that many businesses use to manufacture these everyday goods. Because they are largely uniform products constantly traded in bulk all over the world, commodities tend to react fairly quickly to changing economic conditions. As demand for goods and services rises, for example, the value of the commodities that go into making those goods and services tends to rise too. (In fact, in many cases, the rise in the prices of basic commodities can be the trigger of inflation, causing prices to increase all along the manufacturing chain.) Of course, the opposite is also true: when inflation moderates, commodities and the businesses that produce them can often feel the pinch quite acutely. This ability to keep pace with rapidly rising prices can make for a compelling investment during times of high inflation. Holding commodities (or shares of commodity-producing businesses) can often help to offset the negative impact of inflation on other parts of a portfolio. Just keep in mind that commodity investments can be notoriously volatile – when inflation recedes, commodities often drop in value, and often quickly. Real estate As a physical “hard asset,” the price of real estate tends to keep pace with the overall cost of living. That’s largely because the cash flows from real estate assets can be adjusted in response to inflation – landlords can increase rents. Because the value of a given property is usually calculated as a multiple of the rent that can be realized from it, the principal value of a real estate asset usually holds up pretty well during inflationary times. This isn’t a hard-and-fast rule, of course. Residential home prices can certainly suffer a drop if interest rates increase rapidly and demand slows (such as is happening now). As income property owners know, property taxes, maintenance costs and the price of home repairs tend to rise during inflationary times – and this can certainly affect the value of rents and erode the value of a given property. Different economic forces can affect sub-sectors of the real estate market very differently: the price of office real estate, for example, is currently under pressure because of the dramatic shift toward many people working from home in a post-Covid world. A lot of us are already exposed to real estate by way of home ownership. If you’re interested in adding more, direct ownership of a rental property is always an option. For those seeking increased diversification, a real estate investment trust (REIT) can be a good choice. Keep in mind, however, that many REITs have been impacted by rapidly rising interest rates, so make sure to do your research (or hire a professional ETF or mutual fund manager to do it for you) before you jump in with both feet. Precious metals Like all metals, gold, silver, platinum and palladium have a variety of real-world uses such as in jewellery, electronics, auto components…even as dental fillings. But their primary use is financial. They are considered to be stores of value, primarily because investors perceive their worth as somewhat unconnected to the goings-on in the broader economy. In practical terms, this means that precious metals have a negative correlation to broader stock and bond markets; their price tends to rise when these other asset classes fall or, at the very least, fluctuate independently of major market moves. The history of gold is instructive here: during the last major inflationary period in North America from 1973 to 1979, inflation averaged about 8.8% south of the border. Over that time, gold posted a 35% annual return. If inflation remains high for an extended period, many market watchers expect gold to do equally well. Does this mean that you rush out and start burying gold bars in the backyard? Not exactly – gold’s recent history as an inflation Fending off inflation: investment ideas to consider Periods of high inflation (or even rapidly fluctuating inflation) demand a somewhat different approach to portfolio management than times at which inflation is benign. Here are some ideas that can help you buffer your portfolio against inflation’s effects: 28 | www.snowbirds.org
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