Analysis from S&P Dow Jones Indices ahead of the rate announcement by the Federal Reserve on 14 June assesses the historical impact of rising interest rates on various commodities.

Oil is the most sensitive commodity to inflation although its volatility might put some investors off.

Jodie Gunzberg, head of commodities indices at S&P DJI, commented: “Historically, rising interest rates are positive for commodities for two reasons. One is the return on collateral increases, pushing up total return. The other reason is that producers may be disincentivised to produce and store as carrying costs increase.”

However, the cost of carry is different for each commodity. For example, oil inventories are relatively expensive to hold whereas gold is relatively cheap to store. This difference affects the returns of these commodities when rates rise.

“In rising rate periods, (WTI) crude gains on average 49%, Brent crude gains nearly double that (90%), while gold only gains 28% on average. If rates rise, it can possibly be the catalyst to get US inventories down, which is the key factor in the oil rebound” said Gunzberg.

Source: S&P Dow Jones Indices

Investors can gain exposure to crude oil prices through ETFs such as the ETFS WTI Crude Oil (LON: CRUD) which has $870m in AUM and a total expense ratio (TER) of 0.49%.

Another indicator the market is watching closely is the monthly consumer price index (CPI). However, Gunzberg points out that while some investors might prefer the lower volatility and safety of gold in an environment of political uncertainty, it is a mistake to assume gold is the best commodity to use an inflation hedge. “An investor can get almost triple the inflation protection from copper compared to gold. Copper has an inflation beta of 9.2 versus just 3.5 for gold. Oil is better still with an inflation beta of 16.5.”

In the event the Fed raises rates at a slower pace than currently expected, the dollar might come under pressure which should provide a boost to all commodities. However, similarly to rising US rates. a falling dollar does not impact all commodities equally and the more economically sensitive copper and oil fare better than gold.

“On average for every 1% the dollar falls, copper gains on average 3.5%, Brent crude gains 4.5%, WTI crude gains 4.3% and gold just 3.5%,” said Gunzberg.

The ETFS Copper (LON: COPA) has $260m in AUM and a TER of 0.49%.