Inflation hedge with commodities future

February 23, 2012 11:05 am

Boldly stated: in an inflationary environment, 1 currency unit (for instance 1 US dollar or 1 UAE dirham) is worth less ‘tomorrow’ than it is today. In case of deflation, with 1 currency unit, more goods (or services) can be bought in the future than today.

The Thomson Reuters/Jefferies CRB Index (in short CRB) is a good indicator through which to track inflation. This broad index is comprised of 19 commodities as quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges. These commodities are sorted into four groups, each with different weightings. For instance petroleum-based products (based on their importance to global trade), always make up 33% of the weightings.

The futures on the CRB Index are listed on NYBOT in New York and the electronic trading platform ICE in London. The trading unit of the CRB futures (ticker symbol CR) on ICE is $50 times the CRB Index. Like other indexes, the contracts are being cash settled. The last trading (expiration) day is the second Friday of the expiration month. For the contract specs, I suggest you to go to the ICE website.

CRB Weekly Chart

The CRB chart below, derived from, illustrates the performance since 2007. Noteworthy is the peak in the 2008, when food and oil prices were reaching all time highs. Riots due to high food prices, like the ‘taco riots’ in Mexico, took place during these times. The headlines in the media in 2008 were focused on high oil and food prices. Ironically, since then the CRB Index crashed from over $470 to $200.

Since the trough in 2009, CRB rose 80% towards $360 but did not recoup the losses completely since the peak in 2008. WTI crude oil on the other hand, rose 185% since the low of $35 per barrel in 2009. WTI is currently hovering above the natural number $100 per barrel. If WTI rallies and manages to break the 2011 high of $115, we can also expect a rise of CRB.

CRB is challenging the resistance level from the peak of 2011 and seems to break out to the upside. This implies upward pressure on inflation (again). If you would like to hedge (protect) yourself against inflation, CRB futures can be bought.

1 CR contract means $50 per $1-point fluctuation in the CRB Index. Suppose 1 contract has been bought (long) @ 318 and CR will rally to $368 (high of 2011), the profit would be $2,500 (50 points multiplied by $50). Losses will occur of course in case CRB falls.

On the other hand: in case CRB breaks the low of 2011 around $295 a selling opportunity might occur. Depending of your vision (inflation versus deflation), a suitable (hedging) strategy can be applied.