The Urge to Hedge: Why Chasing Reflation May Be the Riskiest Move You Make
Given the volatility we've seen in the markets since the war began a month ago, clients have been asking more about hedges. The concern is that stagflation like we saw in the 70s will return and that a period of high inflation and low growth could be a difficult environment for both stocks and bonds. So here are the common alternatives being discussed: gold, commodities, energy stocks, and buffered ETFs. Here's my thinking.
This Is the 1970s. Or Is It?
The 1970s comparison is irresistible right now — and not entirely wrong. An oil supply shock triggered by Middle East conflict, inflation re-accelerating just as it seemed contained, central banks caught between fighting prices and supporting growth. The surface resemblance is real.
But the 1970s inflation wasn't caused by the Yom Kippur War. The oil embargo was the match — the wood had been piling up for years. Nixon had untethered the dollar from gold in 1971, removing the anchor on money supply. The Fed, under Arthur Burns, was politically pressured to keep rates low rather than tighten into the shock. Strong unions meant workers could demand higher wages to cover rising prices, which fed back into prices, which fed back into wages — a spiral that ran for years. Vietnam War spending had already been running the economy hot. The oil embargo didn't create that decade of inflation. It ignited conditions that were structurally primed to burn.
Those conditions are largely not present today. The Fed has demonstrated — just three years ago — that it will tighten aggressively when inflation demands it. Oil intensity in the US economy is dramatically lower than in 1973. Union bargaining power is a fraction of what it was. There is no wage-price spiral currently running. This crisis may well produce an inflation spike — it already has — without necessarily igniting a decade of sustained stagflation. Anyone rotating heavily into gold and commodities today is not just betting on the crisis. They're betting on a very specific chain of structural conditions repeating that may simply not be in place.
But here's the deeper problem, regardless of how the macro plays out. Gold and commodities have no intrinsic compounding engine. They don't generate earnings. They don't pay dividends. They don't represent ownership in businesses that adapt, innovate, and grow. Their price is entirely a function of supply, demand, and sentiment — which means what goes up on fear can come down just as swiftly when the fear subsides. Equities, by contrast, are claims on real productive enterprises. Even through inflation, recessions, and geopolitical shocks, businesses generate cash flows that compound over time. That's not true of a bar of gold or a barrel of oil. We explored exactly this dynamic — how different asset classes have performed across 35 years of wildly different market environments — in What 35 Years of Data Taught Me About Investing and in the Periodic Table of Investment Returns.
The 1970s taught us that commodity hedges can work spectacularly in the right conditions. What the two decades that followed taught us is that when those conditions change, there is no floor. Gold fell 70% in real terms from its 1980 peak and took 25 years to recover. Not because something went wrong. Because the crisis ended, as crises do. Black Swans looks at this dynamic more closely — why the events that feel most certain in the moment are often the hardest to profit from.
Which raises a fair question: why didn't we just hold gold and commodities all along as insurance? Because the long-term real return on commodities is approximately zero — over time, commodity prices track inflation and little more. You're not being compensated for holding them during the long quiet stretches between crises. You're just waiting and paying the volatility tax. We'd have been explaining that drag to you every year in exchange for protection that, most years, you didn't need. The discipline of a diversified, evidence-based portfolio means we don't try to predict which shock is coming next. That's not a failure of the approach. It's the approach.
The Painful Truth About Where We Are Right Now
Gold has already more than doubled since early 2024 and recently traded above $5,000 an ounce. Oil has spiked sharply. These moves have already happened. The question isn't whether a commodity hedge would have helped — it clearly would have. The question is whether adding one today, at these prices, with this much already priced in, is a sound decision.
Markets don't wait for certainty. By the time a crisis is obvious and the consensus is clear — and right now the consensus is very clear — a significant portion of the risk premium is already embedded in prices. You would be buying the insurance after the house is already on fire, and paying fire-sale prices for it. The same pattern plays out with individual stocks — Scott wrote about it in Think Twice About Chasing the Biggest Stocks.
This doesn't mean things can't get worse. They might. But rotating into energy and gold now is a directional bet on how long this lasts and how far it escalates — and that's a timeline no one can reliably predict.
A Word on Structured Notes and Buffered ETFs
I want to address something else I've been seeing in prospective client portfolios lately. Structured notes and buffered ETFs — products that use options strategies to limit downside in exchange for capping upside — are increasingly being marketed as protection against exactly this kind of volatility.
The pitch is intuitive. Participate in upside up to a cap; absorb losses only beyond a buffer. In a scary market, it sounds like the best of both worlds.
The evidence says otherwise. AQR recently examined all 99 options trading-related funds with five-year histories through January 2025 and found that two-thirds delivered lower returns than a simple 70/30 stock-and-cash portfolio. And despite the promised protection, 81% of buffered products had greater drawdowns. Lower returns and greater drawdowns — that's not a trade-off, that's a bad deal dressed up in elegant packaging.
The protection is also conditional in ways that matter. Buffered ETFs only deliver their promised buffer if you hold them for the entire defined outcome period. Buy mid-period — which most people do — and you may receive none of the buffer and all of the downside beyond it. Structured notes carry a separate and additional risk that buffered ETFs do not: they are unsecured debt obligations of the issuing bank. If that institution runs into trouble, the protection in your note is only as good as the bank's creditworthiness. Lehman Brothers structured notes became worthless overnight in 2008. That's not ancient history, and it's not a footnote. For a deeper look at liquidity risk in complex products, see When You Can't Get Your Money Back.
Both products carry higher fees, embedded tax inefficiencies, and a complexity that can create the illusion of precision. The underlying source of return is still just the stock market. There is no free lunch inside the options structure.
What We're Actually Doing
Our portfolios were built to handle exactly this kind of environment — not by predicting it, but by being structurally prepared for it.
Broad global diversification means our clients already have meaningful exposure to energy companies, materials producers, and other commodity-sensitive businesses through their equity allocation — so when oil spikes, some of that is already reflected in portfolio returns, without the need to hold commodities as a separate asset class. The exception is if you've explicitly asked for reduced fossil fuel exposure in your portfolio — in which case that tradeoff is more visible right now, and worth a conversation. Systematic rebalancing means we are already trimming what has run up and adding to what has lagged. And the discipline not to react — to not pile into gold at $5,000 or energy stocks at a multi-year high — is itself a form of active risk management. As I wrote in Don't Just Do Something, Sit There, staying still in a volatile market is not passivity. It's one of the hardest and most valuable things an investor can do.
This is a genuinely difficult moment, and I won't pretend otherwise. But the right response to a real crisis is not to abandon a carefully constructed plan and chase what has already moved. It's to stay anchored to what the evidence says works over time — and to make sure your allocation reflects your actual risk tolerance, not your anxiety about the last few weeks.
If you'd like to talk through your specific situation, I'm always happy to do that.
The information above is for educational purposes and does not constitute personalized investment advice. Past performance is not indicative of future results. Investing involves risk, including possible loss of principal.
