Energy, led by crude oil and natural gas, has been the standout gainer in commodity markets this year. That marks a shift from 2024 and 2025, when precious metals drove the rally. Concerns over supply disruptions in the Middle East have been the main force pushing energy prices higher.
So is crude oil an effective inflation hedge in a high-inflation environment? The answer is no. Oil prices do not follow a structural upward trend but swing with the business cycle and supply-demand shifts. The consumer price index, by contrast, keeps rising. Assets meant to defend against inflation risk should therefore be stocks or gold, which trend higher over time, rather than cyclically sensitive commodities.
Gold prices have traditionally been understood to move inversely with real interest rates. Until the pandemic, the yield on 10-year U.S. Treasury Inflation-Protected Securities, or TIPS, and gold prices moved in opposite directions. Because gold pays neither interest nor dividends, rising real rates raise the opportunity cost of holding it and push prices down, while falling real rates make it more attractive.
That formula broke down after the pandemic. The U.S.-China trade conflict, geopolitical clashes and concerns over the massive U.S. fiscal deficit all converged. The decisive factor was that central banks questioning the safe-haven status of U.S. Treasurys cut their holdings of dollar-denominated assets and bought gold to diversify their foreign exchange reserves.
This year, signs that the traditional relationship between gold and real rates is being restored are unmistakable. After real rates touched the 2.5% line at the end of July for the first time since the 2008 global financial crisis and then pulled back, gold prices surged about 15% in the month of August. When real rates climbed again, gold prices fell back and volatility increased. Gold is an excellent inflation hedge, but holding gold alone when real rates are high means accepting considerable risk of a price correction.
So what is the alternative? I propose a portfolio that pairs global equities — U.S. growth stocks in particular — with gold. U.S. growth stocks can also face valuation pressure when real rates rise, but innovative companies backed by solid earnings growth and cash flow have proved able to deliver outstanding performance through macroeconomic shocks.
In fact, the historical correlation coefficient between returns on U.S. growth stocks and gold is close to zero. That means combining the two assets can improve a portfolio's Sharpe ratio. Today, with high real rates and inflation risk coexisting, the answer is diversification that holds U.S. growth stocks and gold in balance. Adding some Korean government bonds and equities to reduce won-dollar exchange rate risk would make it better still.