Eight years ago, I issued this clarion call to my readers: “Reallocate Your Portfolio, Before the Next Wave Hits.” The wave in question was inflation, which I described thusly: “I expect inflation to migrate out of stocks and into the overall economy as global trade tensions heat up.”

Bear in mind, that statement was made in the summer of 2018, more than six years before the Trump administration would take global trade tensions to a new level. Nevertheless, I had a strong intuition that commodity prices were about to go on a tear.

I admonished in that article, “don’t wait until after rising inflation has already eaten into your hard-earned gains.” I knew my timing was early, but I wanted to have that hedge in place by the time I really needed it.

That time came along two years later with the onset of the coronavirus pandemic. The Fed slashed interest rates to almost nothing while flooding the credit markets with cash.

That action had the desired effect of preventing the economy from imploding. However, it came at the cost of igniting inflation that pushed most commodity prices considerably higher.

Fixed Costs, Variable Prices

In that article, I cited the Fidelity Global Commodity Stock Fund (NYSE: FFGCX) as an example of an easy way to hedge against inflation. This fund’s assets are roughly evenly divided between companies in the energy, agriculture, and mining sectors.

When commodity prices rise suddenly, profit margins can expand quickly for the companies that source them. That’s because their production costs are fixed while the prices at which they can sell those commodities are variable.

The day that article was published, FFGCX closed at $13.54. For the next eighteen months, the fund traded sideways. But once the Fed started slashing interest rates, its share price shot upward. By April 2022 it was trading above $22 as shown in the chart below.

That was as high as it would go. The Fed began raising rates to curb inflation and FFGCX started trading sideways again. That is, until last week when it finally broke above the $22 threshold again.

Wall Street is getting nervous that the next Fed chair won’t be nearly as reluctant to slash interest rates as Jay Powell has been. Also, there is a concern that recently enacted import tariffs will ultimately be inflationary.

Musical Chairs at the Fed

Once again, my intuition is telling me that this may be a good time to overweight commodities. Regardless of what the dot plot released by the Federal Open Market Committee members this week looks like, it may be a moot point in six months.

That is when current Fed Chair Jay Powell’s term expires. His successor will be someone handpicked by President Trump, who has made no secret of his desire to see the Fed greatly reduce its policy rate. The dot plot issued this June may bear little resemblance to the one issued this week.

That is why bond investors are quietly building up their inflation hedges. They want to buy into those assets now before their prices start escalating rapidly.

I think that’s a smart move. Inflation moves slowly, but once it gets some momentum going it is difficult to stop. That is one wave you want to be ahead of, even if that means catching it a little early.