As we move into the new year, investors are once again asking about commodities. After several years of inflation shocks, supply chain disruptions, and geopolitical volatility, commodities have re-entered the conversation as more than just a niche allocation.
But commodities are often misunderstood.
Are they an inflation hedge, a growth asset, a trading vehicle, or a portfolio stabilizer?
The honest answer is this: they can play different roles at different times, but only when used intentionally and in the right size.
Here is a practical framework for how to think about commodities inside a long term portfolio.
WHAT COUNTS AS A COMMODITY?
Commodities are raw materials used in the global economy. Broadly, they fall into three main categories:
Energy
- Oil
- Natural gas
- Refined fuels
Metals
- Gold and silver (precious)
- Copper and aluminum (industrial)
Agriculture
- Wheat, corn, soybeans
- Livestock and soft commodities
Most investors do not buy physical commodities directly. Instead, they gain exposure through:
- Commodity ETFs and mutual funds
- Futures based funds
- Natural resource and energy company stocks
- Broad real asset funds
Each structure behaves differently, and that matters for long term results.
WHY COMMODITIES ARE BACK IN THE CONVERSATION
Recently, stronger price performance across several commodity segments has started pulling investor attention back toward the space.
That is normal and behavioral.
In investing, interest usually follows performance. Most investors grow curious about an asset class after prices have already risen substantially, not before. We see this pattern repeatedly across markets:
- Technology after rallies
- Real estate after price booms
- Commodities after inflation and supply shocks
In fact, this article was drafted on Thursday, and the very next day silver experienced a sharp sell-off of roughly 30 percent. That kind of rapid reversal is not unusual in commodity markets and serves as a real time reminder that price momentum can change quickly.
The risk is not that commodities are bad after a run. The risk is that expectations often rise faster than fundamentals at exactly the wrong time.
Disciplined portfolio construction typically works in the opposite direction:
- Add through structure, not headlines
- Rebalance into strength
- Avoid chasing late cycle momentum
Performance should inform awareness, not dictate allocation size.
THE CASE FOR COMMODITIES
Inflation Sensitivity
Commodities are inputs to the economy. When input prices rise, commodity prices often rise first.
That makes them one of the few asset classes that can respond positively during inflation shocks, especially unexpected inflation.
However, this is not smooth or consistent. Commodities tend to hedge inflation surprises better than steady, moderate inflation.
Diversification Benefits
Commodities have often shown low or shifting correlation with stocks and bonds.
At times when:
- Stocks struggle due to cost pressures
- Bonds struggle due to rising rates
Commodities sometimes move differently. In modest allocations, this can help improve overall portfolio balance when paired with disciplined rebalancing.
Correlation is not static, but the diversification effect has appeared often enough to justify consideration at smaller weights.
Supply Constraints Are Real
Unlike financial assets, commodities are constrained by physical realities:
- Production capacity
- Exploration timelines
- Infrastructure
- Regulation
- Geopolitics
New supply often takes years to bring online. That creates cycles where underinvestment leads to later price spikes. We have seen versions of this dynamic across energy, metals, and agriculture in recent years.
THE CASE AGAINST COMMODITIES
No Cash Flow
Commodities do not produce earnings, dividends, or interest.
Stocks represent businesses.
Bonds represent contractual cash flows.
Commodities represent price exposure only.
That means long term returns rely primarily on price movement, not income and compounding.
High Volatility and Cyclicality
Commodity cycles are often extreme:
- Booms driven by shortages or demand spikes
- Busts driven by oversupply or demand slowdowns
These cycles can last years and are notoriously difficult to time. Investors who enter late in the cycle often experience sharp reversals. We saw this on Friday with the drop in silver prices.
Futures Structure Drag
Many commodity funds use futures contracts rather than physical holdings. When futures markets are in contango, where future prices are higher than spot, funds can experience roll costs that drag returns even if spot prices are flat.
This is one reason commodity ETF performance sometimes differs from headline price moves.
Long-term success has far less to do with predicting the next 12 months and far more to do with:
- Diversification
- Discipline
- Time
- Staying aligned with your plan through inevitable surprises
WHERE COMMODITIES FIT IN A PORTFOLIO
For most long term investors, commodities are best viewed as a supporting diversifier, not a core growth engine.
Typical uses include:
- A small allocation inside a diversified portfolio
- Part of a broader real assets sleeve
- A tactical hedge during inflation or supply shocks
- Exposure through energy and resource equities instead of raw futures
Position size matters. Small allocations can help diversify. Large allocations can dominate portfolio risk.
Think of commodities like seasoning in a portfolio:
- Too little → little impact
- Too much → overwhelms the mix
- Used thoughtfully → improves balance
They are most effective when:
- Paired with disciplined rebalancing
- Sized modestly
- Structurally understood
- Not expected to compound like stocks
Commodities are typically most useful as a supporting allocation, not a primary driver of long term growth.
CLOSING THOUGHT
Commodities remind us that markets are not just financial. They are physical. They reflect real demand, real scarcity, and real production limits.
That makes them useful tools, but not universal solutions.
The goal is not to predict the next commodity cycle. The goal is to build a portfolio aligned with your plan and resilient enough that you do not feel pressured to chase returns.
Investing involves risk, including loss of principal. Commodity investing involves additional risks including volatility, futures structure costs, and geopolitical exposure. Allocations should be evaluated within the context of your full financial plan.
