Russ Koesterich, chief investment strategist of iShares, says that macroeconomics largely determine commodities’ returns. But there’s another factor, too: the level of real interest rates, which reduce the opportunity cost of holding an asset.

Real interest rates remain low, with real rates for 5-, 7-, 10-, and 20-year Treasurys below zero as of June 1.

AdvisorOne recently asked Koesterich (left), a CFA and managing director, if he believes analysis from a few months ago—“The Commodity Conundrum: Can Commodities Stay Strong Without Inflation?”—is still valid in light of current global conditions.

AdvisorOne: What’s your outlook on inflation?

Koesterich: We had a view that inflation was going to remain mild and we would stick with that. I think the issue in terms of the money supply is that people need to differentiate between what the Fed did and the amount of money in the real economy.

The Fed has created a lot of money. But, up until about the middle of 2011 most of that money just sat very quietly on the balance sheet of the banks because the banks weren’t lending. That did start to change about a year ago, but the important thing to keep in mind, at least historically, and it seems to be playing out the same way this time, even when the money supply starts to grow it takes a long time for that to really start to egg on inflation.

So our view has always been while we are going to see some modest price creep in core inflation you don’t really have a risk of inflation getting away from you until probably the back half of 2013.

The U.S. economy is sputtering along, much of Europe is in low- or no-growth mode and China appears to be slowing. What’s your outlook on global growth?

There, I think there has been a little bit of a change. Europe was going to be in recession in 2012—that’s not disappointing. It be might a little worse than people expected. The U.S., as you put it, is sort of sputtering along at its 2% rate which is more or less along expectations.

I think the disappointment this year and why some of the cyclical commodities have not done very well has been that China is slowing faster than many expected. Because of that and given that a lot of the demand for commodities is coming from China … [and] from emerging markets, that deceleration in Chinese growth I think is responsible for a lot of the weakness we’ve seen particularly in the industrial commodities.

What’s going on with real interest rates?

Generally, here’s where we have an environment that I think has not changed since the beginning of the year and it’s very interesting to see the affect it’s had on commodities. Negative real rates, which we have and I think we’ll continue to have for the foreseeable future, all else equal, are a tailwind for commodities.

However, they’re more of a tailwind for some commodities rather than others. When I look at commodity returns of 2012 a broad commodity index is down around 7%-8%. Gold is down only 2%.

Now, again, not a great performance, but gold has held up much better than the broader commodity complex. It doesn’t mean that gold always goes up when real rates are negative. But I do think that the negative real-rate environment, and the prospect for maybe another round of quantitative easing, is one of the reasons that gold has held up relatively better than the broader commodity complex.

Given your analysis of these macro factors, do the arguments that you made last September about the role for commodities in a portfolio still hold?

I think they do for a couple of reasons. First of all commodities, again, as a long-term part of the asset allocation puzzle are diversifying. Now, they’re not going to be diversifying in the near term, particularly when markets are being driven by sentiment in a crisis, but over a long horizon they do act differently than paper assets like stocks and bonds, and that has not changed.

Second, I do think this environment of negative real rates is in place for a couple of years if not longer, and that is also a tailwind. And, then the final argument again goes back to inflation.

Core inflation is low but it’s not dead—it’s about 2.3%. That’s not a disaster by any means, but at that level you still see significant erosion of purchasing power over a multi-decade period.

Given the unresolved fiscal issues, given the unconventional nature of monetary policy over the long term there are still reasons to be concerned about a more significant erosion in purchasing power. That is the other argument for commodities.