Most commodities still trade at historically low levels when adjusted for what we consider to be true inflation. In other words, oil, copper, zinc, silver, natural gas, and most agricultural commodities have all experienced major price declines relative to gold prices over the past decade. Refer to the three charts below as examples.

There are a few ways to interpret this data.

While some might immediately think that gold prices are expensive, we argue that gold is a leading indicator for these other commodities and highlights how undervalued the other commodities are despite their recent appreciation.

Moreover, the long term underperformance in commodity prices versus financial assets has been the key factor in preventing consumer inflation from accelerating. At this stage, with long-term supply being so limited and structural demand forces at play, commodity prices are likely to become a significant driver of inflation.

Furthermore, according to McKinsey & Company, one-fourth of the existing gold reserves today are considered refractory deposits, which require expensive treatment methods to achieve acceptable metallurgical recovery rates. Higher gold prices are thus necessary to make these deposits economically viable.