Commodities | Monetary Policy & Inflation
Part I of this series explained why commodities investing is generally problematic: it doesn’t necessarily diversify a portfolio of financial assets, and worse, commodities tend to underperform financial assets in most economic environments. In this second part, the focus shifts to how commodities investing can nevertheless enhance portfolio returns.
Four Economic Environments
Let’s begin by categorising economic environments, which can be divided into four broad categories: a two-dimensional grid of real growth or contraction on one axis, and of price inflation or deflation on the other. Normally, growth and price inflation are positively correlated, as are contraction and deflation. These two combinations are consequently the most common environments, with growth+deflation and contraction+inflation relatively uncommon…
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