5 commodity trading ideas to help hedge against inflation

Inflation is that pesky financial phenomenon that saps your spending power over time. And although your portfolio may have seen some gains as of late (and congratulations, if so), the slow leak of inflation has left many investors looking for a way to stop potential future declines in their buying power. During historical cycles of inflation, commodities have proven to be a solid inflation hedge.

So, what are investors to do if they are looking to protect their portfolios? First, know that when inflation outpaces increases in household income, market gains and even Social Security cost-of-living adjustments (COLAs), it’s normal to worry that the value of your money is being eroded, because it is. But don’t feel powerless. You have options. Here are a few tips for investors hoping that a commodities hedge can turn into a commodities edge.

First, diversify – but it’s how you diversify that counts

Diversified portfolios can help you optimize your investment returns over time, no matter what inflation may throw at you. And although this may sound like the most basic advice from Investing 101, when it comes to inflation, it’s how you diversify that counts. For example, you can look to invest in a variety of commodities that have performed well during previous cycles of inflation – think oil, gold, lumber, metals and agriculture. All these commodities saw growth during the inflationary periods from 1973 to 1974 and 1977 to 1979.

You can invest in all of these categories via exchange-traded funds (ETFs) – even if you’ve put on your “commodities only” hat for now. Many ETFs on the market today invest in a variety of commodities like copper, real estate and even certain crops. The best way to get started is to search for and browse some options that look appealing to you and are the right fit for your budget.

Breaking it down – commodities for inflationary times

Utility stocks

In addition to commodities ETFs, don’t forget about utility stocks. These stocks are known for paying steady dividends no matter the market conditions or what inflation is doing. Yes, utility stocks will rise and fall, but they almost never swing wildly and are seen as a solid inflation hedge in a world where your buying power is being eroded.

Copper

Copper is used as a raw material in the building of homes, in electric vehicles, in cookware, in solar power collectors and in all manner of wind energy elements, including turbines and power supply. Keep an eye on copper as various industries rely on it with greater frequency and supply chain issues keep demand for this element churning.

Real estate

Location, location, location – could it be an effective hedge against inflation, inflation, inflation? Investments in real estate – either outright via the purchase of a home or investment property, or via real estate investment trusts (REITs) – are often cited as a good way to hang onto your money’s buying power in the face of inflation.

Investment properties, whether commercial or residential, can generate a stream of income you can count on every month via rent. And when you own a physical property, you own a tangible asset, which is generally expected to appreciate over time. If you hang onto your property for several years, it’s possible you could find yourself holding onto an asset with a much higher resale value – particularly if you make improvements to the property while you own it.

Gold

You’ll often hear gold referenced as the “gold standard” (so to speak) in commodities, and for good reason. Gold has a proven historical ability to act as an inflationary hedge. During the period from 1973 to 1979, the price of gold rose by 250.3% or 34.78% annualized. In general, when you see inflation rise, gold appreciates in value. But of course, nothing is perfect – the price of gold can fluctuate wildly, and no investment is ever without risk. It’s true: All that glitters … isn’t necessarily your best hedge against inflation.

The bottom line

When inflation rears its head, millions of investors start looking for ways to plug the leak that is diminishing their buying power. And although no investment offers a guaranteed hedge, there are strategies to play the markets and diversify our portfolios in such a way that can help shore up our investments and successfully ride out the storm.

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