2022 Midyear Market Outlook
Head of SPDR Americas Research
Chief Investment Strategist
Head of Gold Strategy

Consider Inflation-Sensitive Alternatives

US consumer inflation hit a 40-year high of 8.5% in March,1 home prices have jumped 19.8%,2 and the ongoing pandemic and Russian sanctions continue to add pressure to rising commodity prices and global supply chain disruptions. All this points to inflation persisting for longer than expected.

Meanwhile, rising prices have weighed on household reserves. The US savings rate as a percentage of disposable income dropped to 6.2% in March from 26.6% a year ago,3 exacerbating concerns of an economic and corporate earnings slowdown. Mitigating these dual headwinds requires looking beyond traditional markets and including inflation-sensitive assets such as real estate investment trusts (REITs), natural resource equities, infrastructure equities, inflation bonds, broad commodities and gold in portfolios.

These alternative exposures may be beneficial over the near term and have the potential to create a more robust risk-aware strategic asset allocation for the long term.

Incorporating Inflation-Sensitive Assets

Whether through their underlying company operations, direct exposure to tangible assets like property or commodities, or promissory notes obligated to pay returns based on the rate of inflation, inflation-sensitive assets tend to benefit from rising and elevated inflationary environments. And given the sensitivity of these assets to monthly changes in US consumer prices, they can be used as substitutes for both equities and bonds.

The “equity real assets” of global infrastructure, REITs and natural resources all carry higher beta to US Consumer Price Index (CPI) compared to both US and global equity indices. Additionally, they offer correlations to a global 60/40 stock-bond mix ranging from 0.70 to 0.89 over the prior 20 years, as shown in the following chart. Therefore, adding these assets to help shield portfolios from inflation delivers the additional benefit of increased diversification.

Given that specific sectors may be more volatile than a broad traditional beta exposure, investing in a diversified basket of these inflation-sensitive equity themes and industries may be a reasonable approach.

Inflation-sensitive assets also can complement traditional bond allocations. Global core bonds, while providing a low correlation to equity segments of portfolios, are likely to remain under pressure from both inflation eroding the value of coupons and rising interest rates leading to duration-induced price declines. Bonds’ negative beta to inflation, as shown in the following chart, illustrates the trouble bonds have during periods of increasing inflation.

Treasury inflation-protected securities (TIPS) and gold are alternatives to traditional bonds and may help combat inflation and increase diversification. Both exhibit low correlations to the global portfolio, but carry a higher sensitivity to changes in consumer price levels

Inflation Sensitivity versus Correlation to Traditional Assets

Inflation Sensitivity versus Correlation to Traditional Assets

Among the inflation-sensitive alternatives evaluated, broad commodities exhibited the highest sensitivity to changes in inflation, as shown in the preceding chart. This is not surprising as two of the largest contributors to consumer price indices — energy and food costs — are based on commodities. Yet, while broad commodities have showcased high inflation beta over the past 20 years, today’s inflationary environment is more extreme. Taking a longer view showcases the differences between broad commodities and gold.

Using Gold to Defend Against Inflation and Macro Risk

As shown in the following chart, if we go back and include the period of stagflation during the 1970s, gold also has a track record of protecting against periods of extremely high inflation (periods with greater than one standard deviation above the average CPI level). During these limited inflationary shocks, the real return for both gold and commodities was better than that of stocks, bonds, and REITs. And compared with commodities, gold offers the additional benefit of maintaining real returns during periods of extreme disinflation or even deflation.

Performance Based on Inflation Regimes

Performance Based on Inflation Regimes

While inflation remains critical to monitor, the confluence of complex macro risks make volatility a material risk to traditional portfolios. Year to date, gold has outperformed the S&P 500 Index by 14.17%,4 showcasing its ability to protect against equity market pullbacks. Meanwhile gold’s track record of providing diversification to financial assets is well documented with a long-term correlation to stocks and bonds of 0.00 and 0.07,5 respectively.

Exposure to a broad commodity index may offer portfolio diversification benefits, but not to the same extent or as efficiently as gold does in terms of downside risk mitigation. For instance, broad commodities are up 30% year to date but the average 30-day volatility of returns has been 22.57%. Comparatively, the gold price is flat year to date6 and its volatility has been just 13.72%,7 40% lower than broad commodities. Gold’s volatility is also in line with its historical average while commodities is 70% greater than its own average.8

The power of gold in this capacity can be further demonstrated, beyond our brief sample size above, when comparing its up-market and down-market of equity returns to individual commodities and broad commodity indices historically. Commodities such as oil, copper, and even silver are inherently more cyclical than gold and tend to have a higher correlation to market and economic cycles because their demand depends more on pro-cyclical consumption.9

Upside/Downside Capture of Commodities to Equities

Upside/Downside Capture of Commodities to Equities

As a result, commodities historically capture more of the upside movements in global equities compared to gold. But they also experience more of the downside when equities fall. The end result is that commodities’ upside/downside capture ratio of equity returns is less than 1.0 on average, making the asset class a less effective portfolio diversifier. 10 Gold, on the other hand, may not outpace commodities when equities rise, but it provides protection by averaging only a slight negative capture of 1.8% during periods of negative global equity returns.11

Particularly in an environment of elevated volatility due to economic and geopolitical uncertainty, increasing exposure to assets with low correlations and an attractive downside capture ratio is key to creating truly diversified portfolio allocations that result in an asymmetric total portfolio return experience over time.

Implementation Ideas

Adding inflation-sensitive alternatives may help mitigate the impact of elevated inflation and volatility driven by economic and geopolitical uncertainty. Consider:


A distinct gold exposure for inflation and volatility management


An actively managed diversified real asset strategy for risk-managed exposure


A real asset equity position with high inflation sensitivity for differentiated beta