Fascinating new paper, 'Real' Assets by Andrew Ang,
Commodities offer some inflation protection, but they certainly are not a perfect hedge. The overall GSCI correlation with inflation is 29%. This reflects the relatively good inflation hedging performance of energy futures. The correlations of crude oil and energy overall (which lumps crude oil, brent crude oil, unleaded gas, heating oil, gasoil, and natural gas together) with inflation are 23% and 26%, respectively. Non-energy futures are poor inflation hedgers. Agriculture, for example, has only a -4% correlation with inflation.Here is the fascinating claim,
Traditionally, "real" assets such as inflation-indexed bonds, commodities and real estate were thought to have correlate well with inflation and thus provide protection against rising price levels. But many of these assets turn out not to be that "real." Cash (T-bills), in contrast, is one of the best inflation hedges.Here's why,
"[I]nflation hedging is all about the comovement of asset returns with inflation, not the average return. T-bills are highly correlated with inflation because monetary authorities respond to inflation in setting the short-term interest rate..."It's worth reading the whole paper.