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Commodities a good hedge against inflation: analysts

Some advisers recommending investment in oil, metals to mitigate loss of spending power
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The dollar you earned last year has less spending power than the dollar you will spend this year, thanks to inflation.

But if you had invested that dollar a few months ago in oil or copper, chances are you have a lot more dollars to spend today.

The prices for oil and industrial metals have been generally rising for a year now, helping to drive inflation, which is why some investors say they are a good hedge against inflation.

“Oil and copper are the best hedges against inflation, not gold,” Jeff Currie, global head of commodities at Goldman Sachs, recently told Bloomberg. “Gold’s a lousy inflation hedge.”

But Mickey Fulp, publisher of the Mercenary Geologist, begs to differ.

“I bought gold because it retains its value,” Fulp said. “Gold’s a hedge against inflation – it always has been. It’s retained its value for centuries. What happens if the stock market crashes, or even corrects? Stocks go down, no matter what you’re in.”

But Lori Pinkowski, senior investment adviser and portfolio manager at Canaccord Genuity, agrees with Currie.

“Gold has underperformed in this environment and is not a perfect hedge against inflation because when inflation rises, central banks tend to increase interest rates, which leads investors to favour stocks of companies that can increase prices of their goods and services to offset rising prices.”

Nadeem Kassam, head of investment strategy for Raymond James Ltd., tends to agree that industrial metals and oil and even lumber are better hedges than precious metals in the current inflationary period.

“I think having exposure to commodities, certain commodities in particular, like the industrial commodities – crude oil, iron, so on – can provide some relief on the inflationary side,” he said.

“Precious metals are not necessarily always the perfect hedge, given the environment. Usually we get inflation because demand comes back so aggressively. Gold doesn’t necessarily perform well in that environment. Inflation, in our view, is going to remain above trend, so it’s not a good hedge in this environment.”

While lumber isn’t an industrial commodity per se, it is linked to economic growth and is also a good hedge, given the strong demand for housing in the U.S.

“There are strong housing fundamentals in the U.S. that, I think, could prop up lumber prices,” Kassam said. “What we’ve seen in the U.S. is sales-to-listing ratios at an all-time low. There’s very low inventory in the U.S., and there’s a lot of demand. Our analysts at Raymond James continue to believe that we’re kind of in the third inning of the housing cycle in the U.S., so that could be a fairly strong driver for Canadian lumber going forward.”

As to how to get exposure to commodities, there’s direct investment in commodities through futures trading or exchange traded funds or buying shares in oil and gas, mining or lumber companies.

“Investing directly in commodities is much more complex as one must either use future contracts, which require a deep understanding of these financial instruments or exchange traded funds … that hold and manage future contracts,” Pinkowski said. “Both have higher fees and are generally too complicated for the average investor. We would prefer to invest in companies that produce the commodities as they tend to outperform commodities when they are heading higher.”