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Blogs

Commodities – A triple threat?

Sid Queler

April 26, 2021

Commodities have the potential to hedge portfolios against inflation, deepen diversification and improve return potential.

Opinions vary about when inflation will reach levels high enough to cause the Federal Reserve (Fed) to take action. Professional forecasters surveyed by the Philadelphia Federal Reserve in February 2021 expected that inflation will average 2.2% this year.[1] That’s roughly in line with the Fed’s goal of 2% inflation over the longer run.[2]

Consumers, who were surveyed at about the same time, have a different opinion. They think inflation will reach 3.3% during the year ahead. That’s the highest expected rate for inflation since 2014, according to the University of Michigan’s Surveys of Consumers report, and it is well above the Fed target rate.[3]

Inflation is a top concern for asset managers  

In March, inflation replaced COVID-19 as the top concern of professional asset managers, according to a survey of 220 managers responsible for about $630 billion in assets.[4]

Nicholas Jasinski of Barron’s reported: “In March, higher-than-expected inflation was the most-cited tail risk, at 37% ... An all-time high net 93% of respondents expect higher inflation over the coming year. That’s a sign of a rebounding economy on its way out of a recession—91% of investors expect the economy to improve over the coming year and 48% said we’re in a ‘V-shaped recovery.’”[4]

Whether you think inflation will rise quickly or slowly, it’s important to understand the implications of higher inflation. If inflation picks up, we could see:

  • Repricing of the stock market as rising costs impact earnings,
  • Higher bond yields and falling bond prices, and
  • Erosion of the purchasing power of cash and cash equivalents.

Commodities can help manage inflation risk … and more

It’s important for investors to take steps that may help protect their portfolios against inflation. One idea to consider is adding or increasing exposure to commodities. Commodities can be a triple threat, helping investors:

Manage inflation risk

Commodities are real assets—raw materials, agricultural products, oil and gas—that are used to produce goods. When demand for goods increases, the prices of goods increase, and so do the prices of the commodities required to produce them. As a result, commodities prices tend to move higher as inflation rises.

Deepen portfolio diversification

Commodities are a distinct asset class. Historically, commodities have had low correlation to stocks and bonds, and a strong correlation to inflation. Adding commodities to a portfolio of traditional investments may lower overall portfolio risk, as well as mitigate the effect of inflation.

Improve return potential

There are sound reasons to think that commodities have the potential to perform well in the years ahead. For instance:

  • Global recovery should increase demand for goods. As the world recovers from the pandemic, high demand for goods and limited supplies have the potential to push prices of goods—and the commodities used to make them—higher. 

    Already, we have seen prices increase as demand for goods remained unmet because of pandemic-constrained supply. For instance:
    • The IHS Markit Materials Price Index has been moving up since early November 2020, reflecting rising demand for metals, lumber, energy, chemicals, fibers and semiconductors. 
    • In February, the IHS Purchasing Managers’ Index indicated manufacturing delivery times were the second-longest in history, due to materials shortages and shipping delays.5
  • The transition to clean energy requires commodities. Global spending on infrastructure to reduce carbon dependence is expected to be significant. While the move to clean energy may lessen demand for some commodities, others will remain essential.

One opportunity may be found in commodities correlated to extractive industries. While investors focused on environmental, social and governance investing may eschew this territory, there may be potential for the share prices of some of these companies to improve. The transition to clean energy requires both energy and metals (copper, lithium and nickel).

If you would like to learn more about the potential benefits of adding commodities to your portfolio, contact Sid Queler at Sid.Queler@cibc.com or 617-531.6954.

Sidney F. Queler is the chief growth officer of CIBC Private Wealth, US. In this role, he leads the firm’s business development team, setting strategies and practices that broaden relationships with individuals, families, foundations and endowments. Sid also serves as a member of the CIBC Private Wealth US Operating Committee and as a member of the advisory team for the firm's Boston office. In addition to leading national business development, he remains actively involved with client relationships.


[1] First Quarter 2021 Survey of Professional Forecasters. (2021, February 12.) Retrieved March 30, 2021, from https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q1-2021.

[2] Federal Reserve issues FOMC statement. (2021, March 17.) Retrieved March 30, 2021, from https://www.federalreserve.gov/newsevents/pressreleases/monetary20210317a.htm.

[3] Curtin, R. (2021, February 26.) Surveys of Consumers. Retrieved March 30, 2021, from https://data.sca.isr.umich.edu/fetchdoc.php?docid=67077.

[4] Jasinski, N. (2021, March 16). “Inflation Is a Bigger Risk to the Bull Market Than Covid-19, Fund Managers Say.” Retrieved March 30, 2021, from https://www.barrons.com/articles/inflation-is-a-bigger-risk-to-the-bull-market-than-covid-19-fund-managers-say-51615918486.

[5] Johnson, S. (2021, March 22). “Global economic outlook: Will faster economic growth bring higher price inflation?” Retrieved March 30, 2021, from https://ihsmarkit.com/research-analysis/global-economic-outlook-economic-growth-inflation.html.