Why Commodities Shine In A Time of Stagflation
The economic outlook for 2020 isn’t particularly encouraging, with many countries facing a recession, deflation or even a period of stagflation. When the economy is in such a state of distress, many investors look to commodities as an investment strategy. This article will discuss why commodities can be a safe and secure portfolio option in times of high inflation and stagnating economic growth, otherwise known as a stagflationary environment.
What is Stagflation?
Stagflation is a period of economic slowdown coupled with high levels of inflation. In other words, it is a situation where prices for goods and services increase, but demand for those goods and services remains stagnant or decreases. As a result, the contraction of economic demand can cause a recession. This creates a difficult state of affairs for investors, as most traditional investments such as stocks and bonds react negatively to rising inflation.
When To Consider Commodity Investment During a Stagflation
When such an economic environment as stagflation occurs, it can be beneficial to invest in commodities. Commodities do not generally suffer the same losses in value as stocks and bonds, and tend to appreciate in times of inflation. As a result, they can act as a buffer during periods of low economic growth or outright recession.
Benefits of Investing in Commodities During a Stagflation
Investing in commodities during a period of stagflation can provide several key benefits. Here are some of the most prominent:
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Diversification – Investors can diversify their portfolios with commodities to protect against the volatility of stocks and bonds.
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Price Stability – Commodities are often less susceptible to the bumps and dips of stock markets, and their price can be less affected by macro-economic trends.
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Income Potential – Investing in commodities can generate income through dividends, stock splits, and other strategies.
Commodities to Consider During a Stagflation
When deciding to invest in commodities during a period of stagflation, it is important to understand which commodities are the best for such an environment. Here are some that stand out:
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Precious Metals – Precious metals such as gold, silver and platinum are some of the best commodities to invest in during a period of stagflation. They tend to retain their value better than other commodities, and their prices are often correlated to inflation, making them a good hedge against economic uncertainty.
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Energy – Energy commodities such as oil, natural gas and coal tend to appreciate during times of stagflation. This is because they are inelastic and necessary for the functioning of various industries, so their prices are less affected by economic downturns.
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Industrial Metals – Industrial metals such as copper, iron, zinc and tin are important materials for industries such as construction, manufacturing and transportation. As such, their prices tend to be relatively stable in difficult economic climates, making them a good option for investors seeking predictable returns.
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Agricultural Commodities – Agricultural commodities such as corn, soybeans and wheat are essential for feeding the global population, and their prices are largely independent of macro-economic headwinds. As such, they can be a good option for investors looking for predictable returns.
Investing in commodities during a period of stagflation can be a great way to protect against the volatility of stocks and bonds, while also reaping some of the benefits of inflation-related price increases. That said, it is important to remember that these investments still come with risks, so it is always important to conduct thorough research and consult with financial advisors when deciding which commodities to invest in.
