We’ve all been told that inflation is bad for the economy and the people. But then, what is inflation and how does it impact the lives of people? The answer is simple. Inflation is nothing but the general increase in the prices of goods and services in an economy. Now, as the inflation figures go up, the prices of goods and services also tend to go up, making it harder and harder for individuals to purchase them.
That said, did you know that there are many investment avenues that protect you from the effects of inflation by providing you with a chance to earn high returns? Yes, that’s right. And commodity trading is one of the ways through which you can effectively hedge against inflation. Let’s see how.
Since inflation is basically the rise in the prices of goods and services and commodity trading is essentially purchasing and selling commodities, they act as a natural hedge. For instance, when the inflation goes up, the prices of commodities in the commodity market also go up, giving you the potential to earn higher returns. This is precisely why you should trade commodities during times of inflation.
Firstly, you should work towards identifying the type of inflation that’s currently gripping the economy. There are three primary types of inflation - cost push inflation, demand pull inflation, and built in inflation. Here’s a quick look at what these are and how you should approach commodity trading during each type of inflation.
1. Cost Push Inflation
This is when an increase in production cost is carried on over to the final price of the goods. Cost push inflation usually affects commodities like base metals, whereas energy and agricultural commodities remain relatively unscathed. Therefore, during times of cost push inflation, it is a good idea to trade commodities such as aluminium, copper, zinc, lead, and other base metals.
2. Demand Pull Inflation
Demand pull inflation happens when the demand for a good is higher than its supply. Although this can affect almost any commodity, it is usually very pronounced in the case of precious metals and agricultural commodities. That said, it is a good idea to first confirm the existence of demand-pull inflation in a particular commodity before jumping towards trading in it.
3. Built In Inflation
Built in inflation is when workers start to demand higher wages to compensate for the increase in the cost of living. This type of inflation is also occasionally referred to as an inflation spiral since this results in a never-ending circle. During times of built-in inflation, your best bet is to trade commodities like gold and silver. Being precious metals with high future value appreciation, they can protect you from the increases in the cost of living.
With this, hope you now have a fair idea of how to approach commodity trading during times of inflation. If you’re interested in starting commodity online trading, get in touch with Motilal Oswal right away to open a demat and trading account for free.
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