Gold, crypto, commodities, or equities

A long-term investor is probably more concerned with the concept of a store of value. We consider this an asset that should outperform inflation but is not necessarily in close ties with inflation. This is especially so in the short term. Equities (assuming a fair value for a moment) are a real asset. Their underlying cash flows should maintain pace with inflation in the long run. As such, they satisfy the requirements for a store of value. However, due to behavioral difficulties, valuations might become compressed during inflationary periods. As a result, they do not correlate well with inflation as a hedge.

Treasury Inflation-Protected Securities

Treasury Inflation-Protected Securities are, of course, the most visible kind of inflation insurance (TIPS). These link to the CPI and have the full support of the US government. The cost is obvious: you are currently paying roughly 1% for the benefit of not having to worry about inflation. The inflation breakeven (aka the market’s estimate of the likely inflation rate) might also be a part of this.

An inflation cap is a similar tool to the one described above. These derivative instruments pay off if inflation exceeds a predetermined amount. Exhibit 2 shows, for example, the cost of a 10% inflation cap. There is no doubt that these instruments will hedge inflation, but they have a higher counterparty risk than TIPS. It translates into a chance of inflation exceeding a specified threshold level throughout the cap in the world of inflation caps and floors. The Minneapolis Fed converts these inflation cap prices into a more understandable probability. They don’t go back as long as ten years.


Commodities, according to popular thinking, are a solid inflation hedge/store of value. However, after the review of the data, whether one has exposure to direct spot commodity pricing or futures, it frequently exposes that widespread knowledge is not intelligent. 

Commodities haven’t done well in terms of being a store of value. Exhibit 4 divides entities into two categories: oil and the remainder (being proxied by the CRB spot commodity price index covering 22 individual items). With a real spot return of 1.2 percent p.a. throughout this period, oil has just about managed to operate as a store of value (albeit with enormous volatility). Non-oil commodities have not served as a store of value, with a real spot return of -1.6 percent p.a. for the sample.

The return to a commodity futures position consists of three factors — the spot return, the roll return, and the collateral return. Of course, the roll return is affected by the form of the futures curve. Regarding inflation, gold worked as a store of value during the late 1960s/1970s inflation event, generating a 15 percent real return p.a. between 1967 and 1980. It is far from apparent that saying that gold is a good store of value in inflationary times is an intelligent notion based on a single incident. Furthermore, it is difficult to determine what is currently incorporated in the gold price without a sense of fair value.


In this regard, a crucial distinction must be noted between inflation hedges and value stores. The former seeks to follow short-term inflation swings or to track inflation very precisely. Instruments in this category include inflation-indexed bonds and inflation caps. Contrary to popular belief, commodities are neither an excellent store of value nor an inflation hedge.

Gold is frequently cited as an excellent inflation hedge. However, from a value investor’s perspective, its lack of fundamental worth makes it hard to understand what is genuinely in the price. Cryptocurrency supporters will likely say that they are the digital equivalent of gold. However, their fundamental value is effectively nil, and, unlike fiat currency, they lack the benefit of wide recognition as payment for taxes.

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