Inflation hedges are notorious for plunging in value around the time that inflation tops out. Sometimes there is a background story that suggests the hedge will continue to perform well beyond the inflationary period, but in the end it rarely helps.

Case in point, silver in the late 1970s. The precious metal was a little bit like bitcoin back then; digital photography was not yet on the horizon due to the high cost of memory (roughly $50k per megabyte in 1976).

So instead of working on image sensor chips, Kodak and Polaroid focused mainly on suing each other for patent infringement on photographic processes and chemistries. Silver halide's use in film and photographic prints was growing along with the global photography market, and the sky was the limit.

At the same time, the Hunt Brothers were accumulating as much as they could get, which drove the price to almost $50 per ounce before it collapsed to about $11 when the Fed started its tightening cycle under chairman Paul Volcker. Anyone who bought silver in the first quarter of 1980 (when inflation was peaking at around 15% year-over-year) is still sitting on a loss today.

Most of today’s inflation hedges are probably not headed for a big crash like silver. But with year-over-year inflation poised to stop climbing and perhaps reverse in the months ahead, they may still be vulnerable. Let’s take a look at some of the more popular plays:

• Energy stocks

The demand plunge in 2020 forced oil and gas companies to make big output cuts, and the pandemic made energy demand nearly impossible to predict. So most global producers waited for rising demand before trying to respond to it.

That created a situation where supply is lagging demand and energy prices are high. Supplies are likely to catch up to demand later this year, but it is hard to say exactly when. But at this point there is likely more downside risk than upside potential in the sector. We rate Fidelity Select Energy (FSENX) as a hold.

• Crypto and precious metals

Enthusiasm for owning and transacting in gold coins was so strong in the 1980s that many countries introduced their own gold coins to compete with the South African Krugerrand. Today most of the excitement is directed toward cyber-currencies, but the problem is still the same.

These vehicles do not pay interest, so there is no intrinsic value. They can be expected to climb at the rate of inflation plus a percentage point or two. But in the short run their price is determined almost entirely by supply and demand. More than twice as volatile as stocks, we rate Fidelity Select Gold (FSAGX) as a sell.

In the case of crypto there is an argument that transactional demand will lead to additional gains. But with the market cap of cyber-currencies already on par with private gold ownership, and with transaction processors making it easier to move between dollars and crypto options, gains are anything but certain.

• Battery materials

Lithium and nickel are surging as investors play the electrification of transportation. Lithium seems like a solid bet as it’s used in almost all vehicle battery packs, but it’s also one of the earth’s most abundant elements and can be found in brine, clay, and rocks.

The average automotive cell contains about 2% lithium by weight, so the only real limitation is ramping up processing capability as fast as battery demand grows.

Nickel is a bigger problem, but its use will likely be reserved for big and/or longer-range vehicles with premium prices. Most electric cars will likely be built with LFP (lithium ferro phosphate) batteries, which face no long-term mining constraints.

• Inflation-protected bonds

Fortunately, there is no background story here, but there’s no free lunch either. Their income stream reflects the yield on non-inflation-protected Treasurys minus investor expectations for the CPI-U index (an inflation gauge) over the maturity period of each bond. These days that’s a negative number in most cases.

In effect, when you buy the Hold-rated Fidelity Inflation-Protected Index Fund (FIPDX), you are forgoing the income stream because you are being compensated by the inflation adjustment. And the share price can decline if inflation expectations ease faster than interest-rate expectations.

Note: I-Bonds, if held to maturity, do not have any downside risk. Annual purchases are limited to $10,000 electronic per calendar year and an additional $5,000 in paper when using a federal tax refund (see TreasuryDirect.gov).

• REITs

Increased demand for residential housing, some of which is driven by rising wages and a greater need for work-at-home space, is likely to persist longer-term. Ditto for commercial warehouse space, as a higher level of online purchases is likely here to stay.

There is also a lot of potential for commercial repurposing. These factors, along with steady income streams, make REITs less of an inflation hedge and perhaps more like dividend stocks. But keep in mind that interest rates have an outsized impact here, so if borrowing costs go up there is potential for this segment to disappoint.

Given that stocks already provide inflation-protection over long periods of time (typically seven percentage points per year), it doesn’t really make sense to load up on inflation hedges for today’s 7.5% year-over-year CPI rate, which may not go much higher and could ease suddenly within the next 12 months.

Overall, investors should curb their enthusiasm for inflation hedges. Consider limiting your exposure to inflation hedges (excluding REITs) to less than 5% of total portfolio holdings.

Jack Bowers is editor of Fidelity Monitor & Insight. Subscribe to Fidelity Monitor & Insight here.