Real assets, also known as tangible assets, are physical assets that have intrinsic value
and can be touched, seen, or felt. These assets include commodities like gold, silver, oil, and agricultural products, as well as real estate
, and natural resources. Real assets serve as inflation hedges due to their unique characteristics and the way they interact with the economy
during periods of rising prices.
One key feature of real assets is their limited supply. Unlike financial assets such as stocks or bonds, which can be created or destroyed electronically, real assets are finite in nature. This scarcity factor makes them attractive during inflationary periods when the value of paper currencies tends to decline. As the general price level rises, the demand for real assets increases because they are seen as a store of value
that can preserve purchasing power
Real assets also have intrinsic value that is not dependent on the performance of financial markets. For example, gold has been considered a store of value for centuries due to its scarcity and desirability. During times of inflation, when paper currencies lose value, gold tends to retain its purchasing power. Similarly, real estate and infrastructure assets have tangible value and can provide income or rental returns that can keep pace with inflation.
Another reason why real assets serve as inflation hedges is their ability to generate income or cash flows. For instance, agricultural land can produce crops that can be sold at higher prices during inflationary periods. Similarly, oil and gas assets can benefit from rising energy prices. These income-generating properties of real assets provide a natural hedge against inflation as they can potentially offset the erosion of purchasing power caused by rising prices.
Moreover, real assets often exhibit a positive correlation with inflation. This means that their prices tend to rise along with inflationary pressures in the economy. This positive correlation can be attributed to various factors. For example, during inflationary periods, construction costs tend to rise, leading to an increase in the value of real estate assets. Additionally, commodities like oil and metals often experience price appreciation during inflation due to increased demand and production costs.
Furthermore, real assets can provide diversification benefits to an investment portfolio. They have historically exhibited low correlation with traditional financial assets such as stocks and bonds. This means that when financial assets are experiencing negative returns due to inflationary pressures, real assets may provide a buffer by maintaining or increasing their value. Including real assets in a portfolio can help reduce overall risk
and enhance long-term returns.
In conclusion, real assets are physical assets with intrinsic value that serve as inflation hedges due to their limited supply, intrinsic value, income-generating potential, positive correlation with inflation, and diversification benefits. These characteristics make real assets attractive during periods of rising prices as they can preserve purchasing power and potentially provide returns that outpace inflation. Investors looking to protect their wealth against inflationary pressures often consider allocating a portion of their portfolio to real assets.