Many investors have added gold to traditional stock-bond portfolios in recent months as a way to hedge against inflation surprises, geopolitical uncertainty, or the risk of currency debasement amid high government deficits in developed markets.
But we believe now is the time for investors to consider a wider range of commodities. In our view, they can provide a structural source of return and diversification when energy disruptions or renewed inflation weigh on equity and bond returns.
Commodities, especially select industrial metals, should also benefit from long-term trends like electrification, rising power demand, and artificial intelligence (AI) infrastructure investment. While demand from these sources grows, supply in many commodity markets is failing to keep pace.
Why look now?
First, after gold prices rose roughly 10% in August, now may be the time for investors with significant holdings to lock in some gains and broaden commodity exposure beyond traditional “safe-haven” assets.
Second, in the current environment of renewed attacks in the Middle East, we believe energy exposure can help buffer against further supply disruptions. Longer term, we believe stronger-than-anticipated oil demand may warrant looking at portfolio exposure to crude oil.
Third, near-term catalysts in agriculture and industrial metals strengthen the case for broader exposure. El Niño-related risks support agriculture, while AI-linked demand helps keep metals resilient.
How to view gold
We believe central bank demand, continued diversification away from the US dollar, and global debt concerns will remain important structural supports. For investors with substantial gains after the strong rally over the past year, higher prices may provide an opportunity to rebalance some exposure into other commodity sectors.
We believe investors should continue to view gold as a useful strategic diversifier, and we remain constructive on gold prices over the next 12 months. Some investors may also want to explore structured strategies to accumulate gold while earning option income or to benefit from volatility as a source of yield.
How much should investors allocate to commodities, and how can they gain exposure?
Commodities may offer first-time investors a way to tap into global economic growth, hedge against inflation, and diversify risk. They can also provide exposure to parts of financial markets that may be underrepresented in local stock markets. For example, broad European equity indices such as the MSCI EMU have roughly 8% exposure to energy and materials, compared with roughly one-quarter of their market capitalization in the largest sector (financials).
Our analysis of developed market stock and commodity returns also shows that commodities have become less correlated with equities on both three- and six-month horizons over the past year, based on MSCI World and CMCI data. In other words, commodities have been more inclined to rally when stocks decline, and vice versa. This relationship could help smooth portfolio returns through a fast-moving geopolitical and technological news cycle.
CIO prefers active approaches that focus on the most promising opportunities, manage costs, and adapt to changing market conditions.
CIO presently favors a mid- to high-single-digit allocation to commodities within a diversified portfolio, providing meaningful diversification without excessive risk. The exact weight depends on investors’ goals, risk tolerance, and market outlook. Regular reviews and rebalancing are important to keep portfolios aligned.
While commodities can play a valuable role in portfolios, they can experience periodic volatility. Returns are strongest when supply-demand imbalances or macroeconomic risks—like inflation or geopolitical events—are elevated. In such periods, broad commodity exposure can help diversify portfolios and mitigate shocks.
