- Commodities are raw materials (energy, metals, agriculture, livestock) whose prices are driven more by supply-demand shocks than by corporate earnings or interest rates.
- They can diversify stock-and-bond portfolios and often hedge inflation, with research showing strong nominal and real returns during high-inflation surprises.
- Studies suggest a roughly 5–10% allocation can improve risk-adjusted performance in a 60/40 portfolio, though many investors hold less.
- Commodity behavior varies by type (e.g., gold as crisis hedge vs. energy/industrial metals tied to growth) and futures-based exposure adds risks like roll costs and volatility.
Read More
The primary Investopedia article provides a foundation: defining commodities, delineating types (hard vs soft), and outlining commodities’ traditional role in stock market portfolios—most notably their diversification and inflation-hedging properties. To evaluate their current relevance, we cross-reference recent studies and data.
Types and investment mechanics: Commodities consist largely of energy, agricultural, metals, and livestock goods, often with specialized markets and futures exchanges handling spot delivery or physical delivery risk. Investors gain exposure via futures, ETFs (spot-backed or future-based), direct commodity production equities, or physically held commodities. These vehicles carry distinct risks like storage, roll yield, contango/backwardation, and regulatory or supply shocks.
Performance during inflation and volatility: Goldman Sachs shows that a 1-percentage-point inflation surprise historically corresponded to a ~7 percentage-point real return in commodities, while equities and bonds dropped ~3–4 points. Caring indices such as the S&P GSCI have delivered double-digit year-to-date returns during elevated inflation regimes (2024), especially driven by energy and metals.
Strategic allocation and portfolio role: Research from PGIM and PIMCO indicates that commodities outperform in both nominal and real terms during high inflation, and that adding ~5-10 % commodities to a standard portfolio can improve risk-adjusted returns and dampen volatility. Currently, many portfolios hold far less exposure than those targets, meaning commodities may be underrepresented in asset allocations.
Heterogeneity among commodities: Not all assets in the commodity class behave identically. Energy commodities combine supply and demand shocks, industrial metals align with growth cycles, while precious metals like gold shine most when inflation surprises are large or when central bank credibility is questioned.
Risks and caveats: Commodities are volatile, often lack income (dividends or interest), and futures-based vehicles may suffer from roll costs or contango. Performance across inflation regimes is disperse, and long sub-periods (e.g. post-2008) saw commodities underperform stocks by large margins.
Strategic implications: In light of persistent inflation (as observed through 2022–2025), geopolitical tensions, supply chain fragility, and energy transition demands, commodities are likely to retain strategic value for institutional investors. Optimal allocation depends on investor time-horizon, risk tolerance, liquidity constraints, and inflation expectations. Focused exposure to industrial metals and energy may offer asymmetric upside when global macro conditions favor elevated demand and constrained supply. Gold remains a “crisis” hedge rather than core return driver.
Open questions: Will inflation remain elevated or shift downward? How will central banks respond to inflation shocks? What is the sustainability of supply constraints particularly in metals essential for decarbonization? How will regulatory policy or trade tensions further shape costs and disruptions? And how will climate risk influence agricultural commodities?
Supporting Notes
- Commodities are raw materials such as corn, oil, gold, natural gas, livestock and agricultural products.
- Commodities are a distinct asset class with returns largely independent of stocks and bonds; can offer diversification and inflation hedging.
- Gold acts as a hedge against large inflation surprises and geopolitical risk, but underperforms in mild inflation when rates are raised swiftly.
- Energy commodities delivered strongest real returns when inflation surprised to the upside per Goldman Sachs analysis, while agriculture and industrial metals also offered hedging benefits.
- During 2024, the S&P GSCI index rose ~12.8 % year-to-date, with petroleum up ~21.4 %, precious metals up ~13.2 %—outpacing equities in inflationary pressure periods.
- PGIM data (1973–2024) shows commodities outperform both equities and nominal bonds in high inflation regimes in nominal and real terms.
- PIMCO’s study finds that a 10 % commodities allocation in a 60/40 portfolio historically improved returns and lowered volatility.
- T. Rowe Price shows that from 1981 through April 2024, S&P 500 cumulative return was over 3,600 %, whereas S&P GSCI cumulative gain was ~390 %—evidence of long periods of underperformance.