You may not track inflation numbers every month, but you notice it in other ways. The grocery bill that used to be ₹4,000 now crosses ₹5,000. School fees rise steadily. Fuel costs fluctuate. Over time, the same salary seems to stretch a little less. This gradual squeeze on purchasing power is inflation at work. While it often feels like a short-term inconvenience, over the years, it can quietly reduce the real value of savings and fixed-income investments. For those who are planning for retirement, children's education or long-term wealth creation, it can present a practical challenge: how to ensure money grows faster than rising prices? One strategy frequently discussed in financial research is the use of commodities as inflation hedge assets. Because commodities such as oil, metals and agricultural goods are directly linked to price movements in the economy, they sometimes respond differently from stocks and bonds during inflationary periods. This article explains how commodities function in this context and how they may fit within Indian portfolios.

Understanding Inflation and Its Impact

Inflation can be thought of as the devaluation of money. It refers to the sustained increase in the price level of goods and services. Inflation is measured by the Consumer Price Index (CPI). When inflation rises:

The real return on fixed deposits and bonds may decline.
Equity markets may experience volatility, particularly in rate-sensitive sectors.
Household purchasing power weakens.

Investors, therefore, look for assets that either maintain or increase value when inflation accelerates.

What Are Commodities?

Commodities are basic goods used in commerce that are largely interchangeable. You can broadly classify them into:

Energy: crude oil, natural gas
Metals: gold, silver, copper
Agricultural products: wheat, rice, sugar
Industrial metals: aluminium, zinc

Commodities derive value from physical demand and supply dynamics. Like how the recent silver price rose because of the limitation of exports. When inflation rises due to higher input costs, commodity prices often increase, potentially offering a natural hedge. This is why commodities as inflation hedge instruments are frequently discussed in asset allocation debates.

Why Commodities May Act as an Inflation Hedge

There are three structural reasons commodities may respond positively to inflation:

1. Direct Price Linkages

Commodities are often part of the inflation basket itself. For example, rising crude oil prices can directly influence the cost of transport and manufacturing, leading to a rise in basics, feeding into inflation.

2. Supply Constraints

Inflation driven by supply shortages (such as disruptions in agricultural production or energy

supply) can lead to higher commodity prices.

3. Real Asset Nature

Commodities are tangible assets, and you will see that during inflationary spikes, physical goods tend to reprice. Global research over long time horizons suggests that diversified commodity exposure has sometimes delivered positive real returns during inflationary periods. However, this relationship is not uniform across all the cycles.

Gold and Indian Investors

In India, gold occupies a unique position. It is culturally significant and widely perceived as a store of value.

Gold as an Inflation Hedge

Historically, gold has shown a tendency to retain value during periods of high inflation or currency depreciation. However:

Over very long horizons, equities have outperformed gold in terms of real wealth creation.
Gold's price increase can be inconsistent when the market is stable and inflation is moderate.

Thus, while many view gold as an inflation hedge, it may function better as a risk diversifier rather than just a growth engine.

Investing in Gold During Inflation?

Indian investors typically buy gold through:

Physical gold (jewellery, coins, bars)
Gold ETFs
Sovereign Gold Bonds (SGBs)

When you are considering investing in gold during inflation, you should look at cost efficiency, liquidity and taxation carefully. Making an evaluation helps you to measure the cost vs profit.

Commodities vs Other Asset Classes During Inflation

Asset Class	Behaviour During High Inflation	Long-Term Growth Potential	Volatility Level
Equities	Mixed; may struggle initially	High	Moderate–High
Bonds	Typically, negative real returns	Moderate	Low–Moderate
Gold	Often positive in sharp spikes	Moderate	Moderate
Broad Commodities	Can rise with inflation	Moderate	High

It is important to note that commodities can underperform during periods of disinflation or economic slowdown. Their cyclical nature makes timing relevant.

How Investors Can Access Commodities?

Unlike developed markets, where commodity futures exposure is more common, as an investor in India, you can usually gain access through:

Commodity mutual funds
Exchange-traded funds (ETFs)
Commodity derivatives (It is subject to regulatory norms and risk suitability)

When investing in commodities, as an investor, you should understand:

Price volatility can be significant.
Returns are often cyclical.
Storage and roll costs affect futures-based exposure.

Commodities are not income-generating assets. They do not pay dividends or interest. The returns just solely depend on price appreciation.

Portfolio Allocation: Practical Considerations

Including commodities as inflation hedge components does not mean allocating excessively. Instead, you may use it to serve as a modest diversifier within a broader asset mix.

Consider the Following:

Risk tolerance: Commodity prices can fluctuate sharply.
Investment horizon: In the short term, performance may be erratic.
Existing exposure: Your portfolios may often already have indirect exposure through equities in the energy and metals sectors.
Macroeconomic outlook: Commodity cycles are influenced by global growth, currency movements and policy decisions.

For example, an investor heavily concentrated in fixed income during a rising inflation cycle may have to consider limited commodity exposure to offset potential real return erosion. Similarly, when inflation is stable or falling, commodities may contribute less to portfolio performance.

Limitations and Risks

While commodities as inflation hedge instruments have historical support in certain contexts, they are not a guaranteed solution. You should include:

Extended periods of underperformance during low inflation.
High volatility linked to geopolitical events.
Limited income generation.
Market depth constraints in certain commodity segments.

Additionally, over long time frames, equities have historically delivered stronger real wealth creation compared to commodities and gold.

A Balanced Approach for Indian Portfolios

For Indian investors, commodities can play a supplementary role more than a core allocation. A diversified strategy combining equities, fixed income and selective commodity exposure may offer better resilience across economic cycles. Gold, in particular, continues to be widely used as a store of value, but its allocation should be proportionate to individual financial goals and liquidity needs. Ultimately, commodities should be seen as one component within your disciplined asset allocation framework rather than a standalone investment for an inflation solution.

Conclusion

Inflation remains a persistent macroeconomic variable that investors cannot ignore. While there is research that indicates that commodities as inflation hedge assets may provide protection during specific inflationary regimes, their performance is cyclical and sometimes volatile. A measured allocation to commodities or gold may enhance diversification in your portfolio, particularly during periods of rising prices. However, decisions should align with risk appetite, time horizon and broader financial objectives. To understand how different asset classes may fit into your portfolio, consult a qualified financial adviser or explore the educational resources available through Indiabulls Securities Limited (formerly Dhani Stocks Limited). Informed allocation decisions are central to maintaining long-term financial stability.