Judging by the stormy volatility we’ve seen in financial markets so far in 2022, one would think the Federal Reserve is gearing up to raise rates. More seriously, it now looks like the take-off will happen as early as March, after which the Fed will start unwinding its $9 trillion balance sheet.

None of this should surprise most of you. Investors, in fact, have already begun to prepare for a new cycle of tightening as well as persistent inflation. 2021 was a banner year for US-listed ETFs, attracting over $900 billion in net flows, and the chart below, courtesy of CLSA, shows where investors were allocating capital over the past two weeks of the year. As expected, technology saw the biggest outflows, as the sector tends to be capital-intensive and has some of the highest valuations.

It also makes sense that financials attract some of the largest inflows in anticipation of higher rates. However, some may scratch their heads first to find top-tier real estate. Don’t higher rates increase borrowing costs and decrease property values?

While this is generally true, real estate investment trusts (REITs) have historically performed well not only in periods of rising rates, but also rising inflation, both of which are commonly associated with economic growth. (Indeed, the US economy grew 5.7% in 2021, its best performance since 1984.) That, in turn, implies higher occupancy rates. Landlords have also demonstrated strong pricing power and, as we all know, are not shy about raising rents.

Looking down $31 trillion in central bank assets

I think the main appeal of real estate right now is that it’s a real asset, just like commodities, metals, gold and other materials, which have also gone through positive flows in the last two weeks of 2021. You may not know this, but the United States is shockingly financialized, with financial assets at around six times the size of the economy.

The size of the Fed’s balance sheet, as I said, has reached an unheard-of $9 trillion, and if you include the assets of the central banks of the European Union (EU), China and the Japan, you have a combined $31 trillion in front of you at the end of 2021.

Given all of this, I think it’s prudent to have some exposure to real assets, which have inherent value outside of the traditional financial system. This is particularly the case today on the eve of rate hikes.

Gold has performed well in times of high inflation and rising rates

Clearly, commodities saw net outflows of $4.2 billion in calendar year 2021. Among the year’s biggest asset-losing ETFs were SPDR Gold Trust (GLD), which lost $10.8 billion, and the United States Oil Fund LP (USO), which lost $2.8 billion.

But with inflation looking much stickier than expected and with infrastructure projects across the country set to begin thanks to the bipartisan $1.2 trillion infrastructure act, I think 2022 will bring a reversal of fortune. for commodities and metals funds. If any indication, investors moved $1.63 billion into GLD on Jan. 22, marking the ETF’s biggest one-day carry in its nearly 18-year history.

It’s a smart decision. According to the World Gold Council (WGC), gold has always performed well in times of not only high inflation, but also rising rates. If we look at the last four cycles of Fed tightening, between February 1994 and December 2015, the yellow metal underperformed in the months leading up to the first Fed rate hike, but then outperformed US equities and the dollar. six months and one year after takeoff.

The reason for this? The WGC thinks a weaker greenback may have given gold a boost, to begin with. And second, US equity returns weren’t as strong as they were before the rate hike, which may have also favored gold as a safe haven.

This would suggest that the time to buy could be now, potentially less than two months before the Fed says it will take action. As always, I recommend a 10% weighting in gold, with 5% in physical bullion and 5% in high-quality gold mining stocks, mutual funds and ETFs. I also think a roughly 2% allocation to Bitcoin, or “digital gold,” also makes sense, especially now that its price is still significantly discounted from its all-time high.

Speaking of gold, read why portfolio manager Ralph Aldis told The Money Show he had his eye on K92 Mining.