---

When prices creep upward, each unit of currency you hold loses purchasing power. If your investments don’t at least keep pace with inflation, you’re effectively losing ground. 

That’s why many investors look for real assets like investments tied to physical or inflation-linked value as a buffer. But not all real assets are equal, and blindly piling into real estate or gold can backfire if you don’t understand the trade-offs. This article breaks down how to hedge inflation using real assets covering commodities, gold, TIPS (or inflation-linked bonds), and real estate while also giving you a framework to build a resilient, inflation-aware portfolio. 

 

What Makes a Good Inflation Hedge (and Why Many Fall Short) 

In theory, an inflation hedge should satisfy a few criteria: 

1. Positive correlation with inflation (or at least when inflation surprises upward)
2. Ability to adjust cash flows or valuations in response to rising price levels
3. Low negative drag in normal or disinflationary times
4. Reasonable liquidity, cost, and accessibility 

 

In practice, many real-asset strategies underperform expectations. For example, during the 2021–2023 inflation surge, broad real asset indices (combining infrastructure, natural resources, real estate) showed weak correlation with inflation, and in some cases slightly negative correlations.  

That underscores a reality: not all real assets hedge inflation equally in all regimes. Asset selection, structure, and timing matter just as much as the idea. 

 

Why Real Assets Matter in an Inflationary World 

Inflation is, at its heart, a theft of purchasing power. When prices rise, fixed-income instruments and cash suffer unless their returns outpace inflation. Real assets, by contrast, often have built-in mechanisms to adjust or react to inflation: rising rents, commodity price spikes, or adjustments in contract terms. 

Recent research affirms that real assets such as commodities, infrastructure, and real estate have historically offered stronger diversification and inflation protection, especially when inflation surprises expectations. 

That said, no single real asset is a perfect hedge in all circumstances. The success of each depends on inflation regime, interest rates, liquidity, taxes, and your investment horizon (General theory on inflation hedges notes that performance varies with horizon and regime).

Let’s examine the main categories. 

 

Commodities (and Natural Resources) and Why they Hedge 

Commodities such as energy, metals, agriculture sit at the base of the supply chain. When input costs rise (fuel, fertilizers, metals), commodity prices tend to climb. Because commodities are tied directly to the real economy, they often lead inflationary cycles. In a real assets analysis, commodities are often rated the highest inflation beta among asset classes.  

Their returns are typically less correlated with stocks and bonds, meaning they offer diversification benefits. A research  of commodity futures and equities shows that adding commodities can reduce portfolio volatility under many regimes. 

Risks & pitfalls 

• Volatility: Commodity prices swing widely due to supply shocks, weather, geopolitical events. What seems like inflation protection in one year may be a loss in another.

• Roll yield / contango: If you access commodities through futures, rolling contracts forward can incur losses in contango markets.

• No yield: Commodities don’t pay dividends or interest, your return is entirely from price appreciation.

• Storage, logistics, and regulation costs: Physical commodities carry storage and handling costs, and regulatory or tax burdens in many jurisdictions.

• Currency effects: In non-USD environments, currency fluctuations can eat into nominal gains. 

How to gain exposure 

• Commodity futures (via ETFs or managed commodity funds)

• Shares in mining, oil, agriculture firms

• Commodity indexes or funds (e.g., broad commodity ETFs)

Because of the volatility, many investors limit commodity allocations to a modest portion (e.g. 5–10%) as a real assets sleeve. 

 

Gold (and Precious Metals) 

Gold, as a commodity, is often thought of as the classic inflation hedge. But the reality is more nuanced: empirical evidence suggests gold’s inflation-hedging is better during extreme inflation or when central bank credibility is doubted, not in modest, expected inflation regimes. CAIA+1 

Strengths 

• Store of value: Over the long term, gold has often preserved real value, especially in high inflation or currency-debasement regimes.

• Safe-haven properties: In times of crisis or when confidence in fiat systems falters, gold often sees inflows. Some studies show negative correlation between gold and currency or inflation surprises. 

• Diversifier: Gold behaves differently from equities and bonds, helping smooth portfolio fluctuations. 

Weaknesses 

• Zero yield: Gold doesn’t produce interest or dividends. Its return is purely from price appreciation.

• Short-term correlation varies: In many periods, gold has failed to outpace inflation or even moved sideways. Its correlation to inflation surprises is uneven. 

• Opportunity cost: Over long periods, equities or real estate may outperform gold significantly.

• Liquidity, premiums and costs: Purchasing physical gold entails premiums; selling may entail discounts; storage and security costs matter.

How to invest in gold 

• Gold ETFs or gold-backed funds

• Shares in gold mining companies

• Physical gold (bars, coins) or allocated vault holdings

• Gold futures

Note: these should be a segment of your inflation-hedging allocation, not your whole portfolio. 

 

TIPS & Inflation-Indexed Bonds 

TIPS (Treasury Inflation-Protected Securities) are bonds with principal adjusted for inflation (often tied to a CPI measure). As inflation rises, nominal principal increases, and coupon payments adjust accordingly. In effect, they embed a direct inflation adjustment. 

Because of this built-in mechanism, TIPS are among the purer, lower-speculation ways to hedge inflation, especially expected inflation. Researchers distinguish between expected and unexpected inflation, noting that many assets respond differently depending on whether inflation was anticipated or shocked. 

Advantages 

• Direct linkage: Because payments adjust with inflation, TIPS offer a built-in mechanism to maintain value in real terms (subject to index and lag).

• Lower risk friction: As government-issued, they are relatively safe (credit risk is low).

• Good “defensive” hedge: TIPS often act as a capital-preserving buffer when inflation spikes. 

Risks & challenges 

• Real interest rate sensitivity: Even TIPS are taxed on inflation adjustments in many jurisdictions, and changes in real rates can affect price. 

• Index mismatches: The inflation measure may not match your personal consumption basket (e.g. CPI vs your local inflation).

• Liquidity & market depth: In some jurisdictions, inflation-linked bond markets are shallow or suffer bid-ask spreads.

• Lag and complexity: The inflation adjustment often has a lag (example 3 months). 

How to invest 

• TIPS directly (if your country issues them).

• Inflation-linked bond ETFs or funds

• Sovereign inflation-linked debt in local markets

TIPS are particularly useful in balanced portfolio strategies—allocate some portion (e.g. 5–15%) to inflation-linked bonds as a cushion. 

 

Real Estate and Infrastructure 

Physical assets like real estate and infrastructure have long been considered reliable inflation hedges because they generate cash flows (rents, tolls, fees) that can adjust over time. 

Why they help 

• Lease escalation & rent adjustments: Many leases embed periodic rent increases or inflation-linked clauses, permitting landlords to pass rising costs to tenants.

• Replacement cost dynamics: The cost to build or maintain property tends to rise with inflation, thus new supply becomes harder, restricting overbuilding. As a result, existing real assets may gain in value.

• Debt depreciation benefit: If you hold property financed by fixed-rate debt, the real cost of debt payments erodes over time in inflationary environments.

• Long-cycle capital appreciation: In many inflationary episodes, property values rise over long periods, offering both income and capital gains.

Research shows that both direct and securitized real estate (REITs, listed property firms) tend to provide protection against unexpected inflation shocks. 

Risks & constraints 

• Illiquidity: Real estate transactions are slow, and selling may take months.

• Operational risk: Maintenance, vacancy, regulatory changes, property taxes, and tenant risk all bite into returns.

• Interest rate sensitivity: Property valuations can be pressured when discount rates (driven by rates) rise.

• Lease rigidity: Long-term leases may delay rent adjustments, muting inflation protection in the short run. (Operating strategies matter.) 

• Local/regulatory risk: Zoning, tax laws, and regional dynamics influence outcomes significantly.

How to invest 

• Direct property ownership

• Real estate investment trusts (REITs) or REIT ETFs

• Real estate funds or private real estate vehicles

• Infrastructure funds with contractual cash flows (e.g. toll roads, utilities)

Because of their hybrid nature (combining capital and income), many institutional investors include real assets as a separate sleeve alongside equities and bonds.  

 

Putting Together a Balanced Inflation Hedging Strategy 

Given that each instrument has pros and limitations, a diversified “real-asset mix” often works best. Here’s how to construct a robust inflation-hedging posture using real assets without overcommitting to any one bucket. 

1. Diversify across real asset types

Don’t rely solely on gold, or property, or TIPS. A well-balanced mix—commodities, inflation-linked bonds, real estate, precious metals—addresses different inflation regimes (gradual, surprise, hyperinflation). (Fidelity). Also if inflation falls or deflation occurs, many real assets underperform. The best hedge strategies adapt or provide flexibility when inflation expectations shift. 

2. Define your inflation exposure horizon
Are you worried about one, three, five, or ten years of inflation? Short-term hedges differ from long-term ones. 

3. Allocate across real asset categories
A sample “inflation hedge bucket” might include allocations to TIPS, broad commodities, gold (modest), real estate (direct or via REITs), perhaps infrastructure or resource equities.

4. Size appropriately
Real assets shouldn’t dominate your portfolio. Many institutional frameworks suggest real assets as a satellite allocation, say 5–20% depending on needs and expected inflation.

5. Be aware of macro risks
If central banks aggressively hike rates to tame inflation, real assets may suffer mark-to-market losses even if inflation is positive. Also, changes in regulation, tax policy, or demand shifts (e.g. remote work impacting commercial real estate) alter outcomes. 

6. Use hedges selectively, not universally 

Inflation hedging is not a “set and forget” overlay. Monitor real assets’ performance versus inflation and adjust as macro or asset fundamentals change. 

 

Real-World Examples and Observations 

Recently, some market observers have advocated blending gold into fixed-income allocations to provide inflation “insurance.” For instance, Morgan Stanley’s CIO suggested a 60/20/20 mix with 20% in gold as a hedge against persistent inflation, per Reuters. 

PIMCO notes that adding real assets to a traditional stock/bond portfolio can help smooth returns and boost performance when inflation is above 2%. 

But caution, during the 2021–2023 inflation episode, broad real-asset indexes did not reliably track inflation in real time, indicating hedge breakdown in certain periods. 

 

Tips and Pitfalls to Avoid 

Watch fees and expenses: Real asset funds, commodity ETFs, and REITs often carry higher fees, those drag especially matters in low-return environments. 

Mind tax implications: Inflation adjustments, dividend yields, rents, and capital gains tax treatment differ across jurisdictions. 

Avoid overconcentration: Don’t lean too heavily on a single commodity or real estate sub-sector. Diversify. 

Maintain liquidity: Real assets tend to be less liquid, keep cash or liquid reserves for flexibility. 

Understand your inflation index: A CPI basket may differ from your personal inflation experience (food, housing, energy). Try to align your hedge to relevant costs. 

Be cautious during rate shocks: If interest rates surge to fight inflation, real assets may get repriced downward temporarily. 

Reassess periodically: Inflation regimes, macro policies, and sector fundamentals shift. Your hedge should evolve too. 

 

 

 

 

 

---

We believe the information in this material is reliable, but we cannot guarantee its accuracy or completeness. The opinions, estimates, and strategies shared reflect the author’s judgment based on current market conditions and may change without notice.

The views and strategies shared in this material represent the author’s personal judgment and may differ from those of other contributors at IntriguePages. This content does not constitute official IntriguePages research and should not be interpreted as such. Before making any financial decisions, carefully consider your personal goals and circumstances. For personalized guidance, please consult a qualified financial advisor.