Buffett shares his thoughts on what to do when commodity prices are rising.
Commodity prices typically rise when inflation accelerates, which is why investors often flock to them for their protection during times of increased inflation—particularly unexpected inflation. As the demand for goods and services increases, the price of goods and services rises, and commodities are what’s used to produce those goods and services. Because commodities prices often rise with inflation, this asset class can often serve as a hedge against the decreased buying power of the currency.
Like all assets, commodity prices are ultimately determined by supply and demand. For example, a booming economy might lead to increased demand for oil and other energy commodities. If the supply of those commodities did not increase sufficiently prior to this increase in demand, the price of those commodities would increase. Conversely, economic shocks that temporarily suppress demand for a particular commodity can cause the price of that commodity to fall rapidly, especially if the producers of that commodity were unable to reduce their supply beforehand. All else being equal, commodity prices tend to also rise when investors expect more inflation on the horizon, as commodities are often seen as an inflation hedge.
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