Commodities Deliver Double-Digit Returns In The Face Of Stubborn Inflation

Commodity markets remain on top of the asset class leader board with inflation drawing the ire of the Fed and other asset classes. The upside surprise in U.S. inflation spotlights the potential benefits of commodities as a diversification tool. The S&P GSCI, the leading indicator of broad commodity performance, has produced double-digit returns in 2024, currently up 12.8% following the uptick in consumer prices. Gold continues to reach all-time highs, surpassing USD 2,344 per troy ounce while cocoa is the best-performing commodity, nearly tripling over the past year. Both components are included in the S&P GSCI, helping produce a diversified exposure to the broad commodity market. For perspective, bitcoin has captured sizable flow into ETFs, and the S&P Bitcoin Index is “only” up 140%, less than half of what cocoa has done in the same period. The S&P GSCI has benefited from holding gold and cocoa, but oil is the largest component and has delivered the strongest historical sensitivity to inflation. The petroleum sector within the S&P GSCI is up 21.4% YTD, with precious metals up 13.2%. In this post, we review the last half century of commodity performance, which covers inflationary regimes and central bank responses.

Commodities have done well when inflation remains elevated, and the Federal Reserve maintains a defensive posture. Breaking inflation into low, medium and high inflationary environments, commodities have experienced double-digit annual gains when inflation exceeds 2%. The average one-year return when inflation measures between 2% and 4% is 13.3%. Exhibit 1 shows the breakdown by inflationary tiers.

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Another way to measure commodity performance is when the Fed maintains a restrictive stance, defined by the Fed Funds Effective Rate exceeding target inflation of 2%. Again, going back the full history of the S&P GSCI to 1970, we measure the annualized returns during such periods and compare that with accommodative environments. The S&P GSCI achieved average annualized returns of 10.6% over the 39 years when the Fed Funds Effective rate was above 2%. This compares favorably to 0.9% average annualized returns during the 16 years the Fed held the effective rate below 2%. We recently covered this in a blog post, and updated the data through April in Exhibit 2.

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A broad basket of commodities has historically helped provide diversification and inflation protection. Unlike traditional asset classes such as stocks and bonds, commodities have unique risk and return characteristics that are often uncorrelated with other investments. The S&P GSCI’s 10-year correlation to the S&P 500® is 0.4, while its correlation to the S&P GSCI Gold component is zero and it has a negative correlation of -0.16 to the S&P U.S. Aggregate Bond Index. Including commodities could help reduce overall volatility and enhance risk-adjusted returns by spreading risk across different asset classes. Additionally, commodities have historically exhibited a positive correlation with inflation, making them a possible hedge against rising prices. As prices for commodities tend to rise during inflationary periods, broad-based commodity indices like the S&P GSCI have demonstrated low correlation to other asset classes as well as positive performance correlation to persistent inflationary environments.


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