After several years of weak performance, many investors had soured on the prospects for investing in commodities. However, disciplined investors who have stuck with the asset class as an important part of a diversified multi-asset portfolio are seeing positive results.

During the past year, the Bloomberg Commodity Index has recorded a return of more than 49 percent, eclipsing the robust returns posted by the Dow Jones Industrial Average (35 percent) and the S&P 500 (43 percent).

Just about all raw materials — lumber, copper, soybeans — are experiencing short supply, high demand and significantly higher prices. The shortages, in most cases, are a product of the global pandemic, which short circuited production of many commodities. In addition, producers and suppliers trimmed their inventories to bare minimums to prevent losses during the pandemic. Now, with vaccinations and economic recovery well under way, consumers have gone on a buying spree, and commodity suppliers are hustling to catch up.

In addition, mounting inflation fears pose another incentive for investors to turn to commodities, which have historically served as an inflation hedge. When the economy heats up, it results in an increase in demand for raw materials, leading to higher prices. During periods of inflation, commodities have typically outperformed equities — one source noted the spread to be 30 basis points on average — while also offering lower volatility.

Gold offers a good example. After a lackluster start to the year, the price of gold staged a significant rally during the month of May. In early March, the spot price of gold registered around $1,680 per ounce, a 19 percent decline from the August 2020 record high of $2,070. As of the end of May, however, gold had rebounded to more than $1,900 per ounce.

The precious metal’s latest surge has been fueled by continued low interest rates and indications of mounting inflationary pressures. With the Federal Reserve’s vow to keep interest rates low for the next few years, inflation will erode real interest rates, and when real rates turn negative, investors can turn to gold as a store of value.

The U.S. personal consumption expenditure inflation index climbed to 3.6 percent in April from a year earlier, marking the strongest reading since 2008 and putting inflation well above the Fed’s 2 percent goal. Investors will need to keep an eye on inflation, as well as the Fed’s response, in addition to the prices of gold-related stocks and ETFs.

Larry Gray is editorial director of Institutional Real Estate Inc.