Hard assets have attracted renewed interest from investors seeking inflation protection in the wake of the price surges of 2021 and 2022 — but their role in a portfolio deserves more careful analysis than the headline appeal of “real assets as inflation hedge” might suggest. Toby Watson, a partner at Rampart Capital, spent a significant portion of his career at Goldman Sachs International working directly with hard asset structures — including lending against physical assets and funding complex real asset transactions. That direct, hands-on experience gives him a grounded and practical understanding of how different hard asset categories actually behave in inflationary conditions, and where the gap between theoretical inflation protection and real-world outcomes tends to emerge.
Why Hard Assets Attract Attention When Inflation Rises
The intuition behind hard assets as an inflation hedge is not entirely wrong. Physical assets have intrinsic utility that does not disappear when fiat currencies lose purchasing power. Their value is anchored in real economic activity rather than purely in financial market sentiment — and when the cost of goods and services rises, so too should the replacement cost and income-generating potential of the assets that produce them.
This logic has historical support. Commodities are directly implicated in inflation dynamics. Real estate has historically provided reasonable inflation protection over long periods. Infrastructure assets with revenue streams linked to inflation indices can provide particularly direct protection. The challenge is that “hard assets” are not a single category — and the inflation-hedging properties of each depend on factors specific to the asset, the market and the macroeconomic context.
What distinguishes hard assets that genuinely hedge inflation from those that do not?
The key distinction, in Toby Watson’s view, lies in the relationship between the asset’s income or value and the price level. Assets whose revenues are explicitly or implicitly linked to inflation — through index-linked contracts, commodity price exposure or replacement cost dynamics — provide more reliable protection than those whose cash flows are fixed in nominal terms. His years working in hard asset lending at Goldman Sachs International gave him a precise understanding of how these linkages work in practice — and, critically, where they break down under specific market conditions.
Toby Watson on the Main Hard Asset Categories
Commodities represent the most direct form of inflation exposure. As inputs to economic production, commodity prices tend to rise when broader inflation accelerates. However, Toby Watson is careful to note that commodity markets are also driven by supply and demand dynamics that can diverge significantly from broader inflation trends. Individual commodities can be highly volatile, and their correlation with consumer price inflation varies considerably depending on the specific commodity and the source of inflationary pressure.
Real estate offers a more complex picture. Residential and commercial property have historically provided inflation protection over long-time horizons — driven by rising replacement costs, land scarcity and the tendency of rental income to adjust upward over time. But rising interest rates — which typically accompany inflationary episodes — increase financing costs and can put downward pressure on valuations, creating a tension that Toby Watson highlights as one of the more important nuances for investors to understand.
Infrastructure: The Most Explicit Inflation Linkage
Infrastructure is where the inflation-hedging characteristics can be most explicit and most durable. Many infrastructure assets — toll roads, regulated utilities, energy networks — have revenue streams that are contractually linked to inflation indices. Toby Watson regards infrastructure, carefully selected and properly analysed, as one of the more compelling hard asset categories for long-term investors with genuine inflation concerns. The directness of the inflation linkage, combined with typically stable underlying demand, makes it a distinctive proposition within the broader hard asset’s universe.
Precious Metals and Their Contested Role
Gold occupies a somewhat contested place in discussions about inflation protection:
- Its historical correlation with inflation is inconsistent — performing well in some inflationary episodes and poorly in others
- Its value rests not on income generation but on its status as a store of value and safe haven asset, making it more reliable as a hedge against financial system stress than against consumer price inflation specifically
- Other precious metals — silver, platinum, palladium — are more closely tied to industrial demand and behave differently from gold in most market environments
For Toby Watson, gold’s role in a portfolio is best understood through the lens of what it is actually hedging, rather than what investors assume it is hedging.
Building an Inflation-Resilient Portfolio With Hard Assets
The most effective approach to using hard assets for inflation protection, in Toby Watson’s assessment, involves several practical disciplines:
- Diversification within hard assets: Rather than concentrating in a single category, a diversified approach across commodities, real estate and inflation-linked infrastructure provides broader coverage across different inflationary scenarios
- Understanding the time horizon: Some hard assets provide better short-term inflation protection; others are more effective over longer periods — matching the asset to the relevant horizon is an often overlooked dimension of the allocation decision
Why Rigour Matters More Than Intuition Here
Applying these disciplines requires exactly the kind of detailed, asset-level analysis that distinguishes rigorous portfolio construction from surface-level comfort. Toby Watson consistently emphasises that owning something “real” is not, by itself, a sufficient investment thesis. The question is always whether the specific asset, in its specific structure, provides the inflation protection the investor believes they are getting — and answering that question honestly requires both experience and precision. It is a standard that Toby Watson applies to every hard asset assessment he undertakes.
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