Why investors are rediscovering commodities

Whether it is copper needed to build artificial intelligence (AI) data centres, critical minerals for the energy transition, central banks buying gold or concerns over disruption to oil flows through the Strait of Hormuz, commodities are back in the spotlight. But their relevance goes beyond today’s headlines: they can also play a valuable role in portfolio construction.

For decades, balanced portfolios relied on equities for growth and bonds for stability. But recent inflationary periods have seen both fall together, prompting investors to seek other sources of diversification.

Against this backdrop, commodities are becoming an increasingly important component of multi asset portfolios, potentially offering both diversification benefits and protection against inflationary pressures. Traditional equity and fixed income allocations remain the portfolio core, but adding differentiated return sources can improve risk-adjusted outcomes (see Exhibit 1).

In this respect, commodities, alongside other alternative investments, stand out because of their historically low correlation with both equities and bonds. Typically behaving differently from traditional asset classes, they can help to smooth portfolio returns through different economic environments.

As rising prices drive interest rates higher, bonds may lose their stabilising role as valuations come under pressure. By contrast, commodities tend to benefit in an inflationary environment. Moreover, because rising commodity prices can themselves drive inflation, commodities may provide a natural hedge against its effects.

This argument may become increasingly relevant in the years ahead. While inflation may move in cycles and experience temporary declines, longer-term structural forces could keep price pressures above pre-pandemic norms.

One potential outcome of high public debt levels is a period of “financial repression”: a scenario in which governments manage high debt burdens through a combination of moderate inflation and interest rates that remain below the inflation rate. Such conditions can reduce the real value of government debt while weakening the purchasing power of savings and fixed income assets. If inflation settles above the level familiar to investors in the past, commodities could remain a valuable strategic portfolio allocation as a real asset.

Not all commodities are responding to the same forces: different segments can provide exposure to distinct economic themes. Some offer exposure to structural growth drivers such as AI, electrification and decarbonisation, while others can help strengthen portfolios against inflation, fiscal pressures and geopolitical uncertainty:

• Industrial metals: invest in electrification, decarbonisation and AI – The transition towards decarbonisation creates new opportunities within industrial metals. The expansion of electric vehicles, renewable energy infrastructure, power-grid upgrades and battery storage increases demand for materials such as copper, silver and other industrial metals. As economies electrify, the strategic importance of these resources is likely to grow. This suggests that future commodity demand may be driven not only by traditional economic growth but also by structural themes linked to the energy transition. The AI boom adds another source of demand. Building data centres and reinforcing the grids that power them requires substantial electrical infrastructure, increasing demand for copper and other conductive metals.
• Gold: reinforce portfolios against fiscal and geopolitical risk – Precious metals also continue to play a unique role within diversified portfolios. Gold has evolved beyond its traditional status as a hedge against inflation and market uncertainty. Central banks have become increasingly important buyers of gold in recent years (see Exhibit 2), reflecting broader concerns around fiscal sustainability, reserve diversification and geopolitical uncertainty. Evidence that central bank demand remains robust provides an important source of support for the gold market. This institutional demand complements gold’s traditional characteristics as a store of value and portfolio diversifier.

Beyond direct exposure, investors can also access commodity-related opportunities through equity markets. Mining companies, energy producers and businesses involved in the energy transition can all provide indirect exposure to commodity themes. For example, mining equities may benefit from rising commodity prices. It’s important to note, however, that their share prices and valuations also depend on company-specific factors such as operating costs, management quality and production growth.

While these investments may not deliver the same diversification characteristics as direct commodity exposure, they can offer additional ways to participate in long-term commodity trends.

We do not consider commodities to be simply a tactical trade driven by short-term geopolitical events or commodity price forecasts. Rather, they are an important strategic asset class in their own right that can strengthen the resilience of a multi asset portfolio.

By providing diversification when traditional assets struggle, helping protect against inflation and offering exposure to powerful structural themes, commodities can play a valuable role alongside equities and bonds.

For multi asset investors seeking a broader toolkit to navigate an increasingly complex market environment, commodities can be a powerful addition, enhancing portfolio efficiency and helping investors build more resilient portfolios for the challenges ahead.