While the purpose of the paper was to measure commodity futures risk premia, it also provides some indirect evidence on commodities and inflation. There is gain from momentum - prices trend and show momentum. There are gains from value - prices that have extremely low move to longer-term averages. There are gains from basis - the cash/futures curve which shows backwardation and contango displays the congestion and value from holding cash inventory.
Saturday, May 29, 2021
Commodities - Hard to go wrong during inflation decades
Looking over the long history of commodity investing suggests that using any number of strategies would have done well during periods of higher inflation. Holding commodities are not without risks based on the size of drawdowns during each decade; however, whether momentum, basis, value, long/short or long-only, commodities can be a good addition during periods of higher inflation. (See Two Centuries of Commodity Futures Premia.)
Of course, the level of inflation during the 1980's and 1990's was still significantly higher than what we are currently seeing, so the potential returns may be muted. Nevertheless, the quick pandemic recession coupled with excess money has already created a huge boom for commodities. Whether this will continue is less clear, but the last year has generated explosive commodity upside but may still allow for further price gains.