Long periods of high growth and high inflation are rare

To invest into commodities, you can choose to buy:

• individual commodity
• existing commodity index (basketo of several commodities)
• companies, such as steel or oil companies, which will benefit from higher prices of their products, or,
• the currencies of countries which have a lot of natural resources

The best time to do so is when inflation and economic growth are both strong.

In practice, though, there have not been many periods where growth and inflation are able to rise at the same time.

• Authorities normally respond to higher inflation by raising interest rates. They only have difficulty keeping a lid on inflation if raising rates weakens the economy too much.
• When there is strong growth, the authorities have a lot of room to move without causing a recession, and so they are able to stamp down on the inflation if necessary.
• Therefore, it has been rare to find long periods of high growth and high inflation.
• (This helps to explain why commodities have seen a 50 year or so price decline in real terms.)

CRB Index since 1950:

In the 1970s:

• there was high inflation, largely caused by OPEC, without strong economic growth.
• Commodities has their best run for a long time but prices still barely rose in real terms, because inflation caused a tripling of average price levels.

In the 1980s and 1990s:

• saw the opposite experience, with falling inflation and many periods of good growth.
• This was miserable for commodity prices in real terms. The economic growth was not enough.
• The increased demand by the growing world economy was generally offset by falls in the costs of production and extraction due to dramatic improvements in technology.
• Technology also helped economies reduce their dependence on the more expensive commodities, such as oil.
• Social changes also reduced the growth in demand for commodities, as economies became more service oriented, and less reliant on manufacturing.

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