Totality Deep Dive: Should commodities form a permanent part of investor portfolios?

Commodities sit at an awkward intersection in portfolio asset allocation. They are essential to the global economy, highly sensitive to geopolitics and inflation, and deeply cyclical—yet they produce no cash flow and can underperform for long stretches.

As a result, many investors treat commodities purely as trading or hedging instruments, used tactically around inflation scares or supply shocks. Others argue that commodities deserve a permanent allocation as a diversifier, inflation hedge, and protector against shifts in economic conditions.

This Deep Dive examines this debate through three lenses: what commodities actually do in portfolios, when they work (and when they don’t), and how investors can think about commodities as exposure rather than instruments.

The conclusion is not binary. Commodities tend to be poor long-term compounders on their own, but they can play a meaningful structural role in the right macro environment, and a valuable tactical role when supply and policy shocks dominate the headlines.

This Totality Deep Dive for April 2026 is for general informational purposes only and reflects aggregated market data and publicly available research. It does not consider any reader’s specific financial situation or objectives and should not be used as a basis for investment decisions.

1. What commodities are, and why they behave differently

At a basic level, commodities represent physical inputs to economic activity: energy, metals, and agricultural goods that sit upstream of production.

Unlike equities or bonds, commodities do not generate income. Their returns come entirely from price changes, which are driven by the balance between supply, demand, inventories, and policy.

Research on futures data stretching back to the late 19th century shows that commodities can deliver positive real returns, but those returns are volatile and uneven, driven primarily by spot price movements rather than steady carry or yield. In contrast to equities, there is no structural reason for commodities to trend upward in real terms, absent shortages or policy distortions (NBER, 2016). This is why commodities frequently disappoint investors who treat them like stocks or bonds—they are not businesses, and do not act as such.

2. The commodity cycle: long droughts, rapid floods

Commodity markets are shaped by capital intensity and delay. Mines, oil fields, and agricultural capacity cannot be switched on overnight. Periods of low prices suppress investment; years later, supply proves inadequate when demand surprises. Prices then spike until investment catches up.

This dynamic explains why commodity returns often arrive in concentrated bursts following long periods of stagnation (NBER, 2016; Lazard Asset Management, 2024).

Historical examples are instructive. The 1970s commodity boom coincided with the collapse of the Bretton Woods system, oil embargoes, and wage-price spirals, driving extraordinary real returns across energy and metals. The 2000s China-led demand story delivered another decade-long surge. More recently, pandemic-era supply constraints and geopolitical conflict reignited commodity performance in 2021–22 (Federal Reserve Bank of Dallas, 2026).

Between these episodes, commodities often underperformed equities and delivered poor real returns for extended stretches. See below for an illustration of the burst-style performance of commodities over time (1996-2026) compared to the compounding of equities.

3. Commodities and inflation: conditional hedge, not permanent shield

The strongest argument for commodities as a part of investor portfolios is their link to inflation surprises. As direct inputs to production, commodity prices often rise before consumer prices do—and can move sharply when supply is constrained.

Studies consistently show that commodities outperform stocks and bonds during periods of unexpected inflation, particularly when inflation is driven by supply shocks rather than excess demand. Energy commodities, in particular, display high inflation beta (Goldman Sachs, 2024; S&P Global, 2023).

However, this relationship is context dependent. When inflation is demand-led and central banks respond forcefully, financial assets may recover quickly while commodities mean revert. Research using US CPI data since the 1960s finds that commodities only hedge inflation effectively when exposure is tightened around changes in inflation expectations, not when held indiscriminately over full cycles (Springer/Palgrave, 2022).

In other words, commodities can successfully hedge inflation when inflation is unstable and surprising, and catches markets off-guard.

Fiscal and industrial policy sits alongside this dynamic. Infrastructure spending, energy security initiatives, reshoring policies, and decarbonisation programs all raise demand for real assets in ways that are not immediately offset by supply. These policy-driven activities have historically supported commodity prices even when broader growth conditions appear mixed (Lazard Asset Management, 2024; Vanguard, 2023).

4. Diversification: useful when stocks and bonds fall together

Commodities are one of the few asset classes that can diversify portfolios during periods when traditional diversification breaks down. During inflation shocks—most recently in 2022—equities and bonds fell together, undermining the core premise of balanced portfolios and the classic “60/40” stocks/bonds portfolio structure.

In those environments, commodities displayed lower correlation with financial assets and delivered positive or stabilising returns. This counter-cyclical behaviour in the face of conflict, sanctions or chokepoints reflects commodities’ sensitivity to scarcity and real-world constraints, rather than discount rates or earnings expectations (Forbes, 2026; CME Group, 2025).

Yet correlation benefits fade in benign environments. During long disinflationary periods, commodity correlations can drift higher, eroding diversification value.

5. Trading tool or strategic allocation?

This debate is often framed too narrowly. The real distinction is not between “trading” and “long term investing,” but between static exposure and context contingent exposure.

Many investors engage with commodities tactically, using them as a way to express macro views when specific conditions arise. In these contexts, commodities function as event-responsive instruments reacting to inflation surprises, geopolitical shocks, supply disruptions, or shifts in policy regimes. Volatility is expected, position sizing is deliberately constrained, and exposure is intended to be temporary. The focus is not on long-term compounding.

Others approach commodities from a more strategic perspective, maintaining small but persistent allocations as a form of portfolio insurance. In this framework, the objective is not to outperform equities or generate long-term growth, but to provide resilience when traditional assets struggle—most notably periods of unstable inflation or real-asset scarcity. Commodities are held primarily because they tend to perform when conventional diversification fails.

The trade-off in this approach is opportunity cost. Strategic commodity allocations can underperform for extended periods when inflation is stable, supply is abundant, and financial assets dominate returns. Without a supportive macro backdrop, commodities can act as a drag on portfolio performance—a point emphasised in long-run studies of commodity investing (Vanguard, 2023).

In short, commodities reward investors who are explicit about why they hold them, what conditions justify that exposure, and when those conditions have faded.

6. The Australian investor lens: are you doubling up on exposure?

Australian investor portfolios are rarely neutral to commodities, even when there is no deliberate allocation to them.

Australia is a major exporter of iron ore, coal, LNG and agricultural products, which means commodity cycles permeate domestic markets. Movements in commodity prices flow through resource-heavy ASX indices, influence the Australian dollar, and shape government revenues and fiscal settings—creating multiple channels of indirect investor exposure.

As a result, many Australian investors already carry commodity sensitivity embedded within seemingly diversified portfolios. In this context, adding direct commodity exposure does not automatically improve diversification. In some cases, it may genuinely broaden the set of return drivers; in others, it may simply amplify existing exposures, increasing sensitivity to the same underlying cycle.

A crucial distinction is between commodity prices and commodity companies. Resource equities offer leverage to prices, but they also introduce business-specific factors such as cost inflation, capital allocation discipline, operational execution and political risk. They may generate dividends and earnings growth, but their performance can diverge markedly from the underlying commodity. By contrast, direct commodity exposure responds much more cleanly to price and scarcity dynamics, without the overlay of corporate balance sheets or management decisions (Vanguard, 2023; LGT Wealth Management, 2024).

Before treating commodities as a new diversifier, an investor should seek to understand how much commodity exposure already exists in their portfolio—and whether adding more truly changes the risk profile.

7. Implementation: how exposure is accessed matters

How investors access commodities can matter as much as whether they allocate at all.

The strongest evidence for diversification and inflation-hedging benefits comes from broad, diversified commodity futures indices, rather than from single commodity positions or shares in commodity-producing companies. Academic and practitioner research consistently finds that diversified futures exposure captures the macro drivers that make commodities useful—scarcity, supply shocks, and inflation sensitivity (Ryan O’Connell Finance, 2026; NBER, 2016; Finder Australia, 2026).

By contrast, single commodity exposure is far more vulnerable to timing risk, weather effects, technological substitution, and policy intervention. Commodity producer equities introduce an additional layer of uncertainty: management decisions, cost inflation, capital discipline, and political risk can materially alter outcomes relative to the underlying commodity price (Vanguard, 2023).

There is also evidence that active commodity strategies can add value under certain conditions. Approaches that manage futures curve exposure can improve returns relative to straightforward index exposure. However, these benefits come with added complexity, higher fees, and greater dispersion of outcomes (Ryan O’Connell Finance, 2026; Lazard Asset Management, 2024).

Position sizing is therefore critical. Research from asset managers suggests that modest allocations to commodities can materially alter portfolio risk characteristics—improving diversification and drawdown behaviour—without overwhelming overall returns.

Larger, permanent allocations, by contrast, increase the risk of prolonged underperformance when regimes do not support commodity pricing power.

Taken together, implementation considerations reinforce the central theme of this Deep Dive. Commodities are neither inherently good nor inherently flawed exposures. Their value depends on how exposure is constructed, how much risk is taken, and whether the prevailing macro environment supports the attributes that commodities are meant to deliver.

8. Conclusion

Commodities are rarely good long-term compounders, but they can be powerful portfolio stabilisers and return enhancers in the right environment. Treating them purely as trading instruments risks missing their value during regime shifts; treating them as permanent allocations risks carrying dead weight during long benign periods.

Investors should always ask themselves, “What regime are we in, and what risks are underpriced?” When inflation, supply, and geopolitics dominate, commodities can earn their place. When growth and financial assets lead, they often fade into the background.

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Sources: National Bureau of Economic Research (NBER); Goldman Sachs; Vanguard; CME Group; Forbes; Lazard Asset Management; S&P Global; Springer/Palgrave; Ryan O'Connell Finance; Bloomberg Professional Services; Federal Reserve Bank of Dallas; LGT Wealth Management; Finder Australia; MSCI.

Disclaimer: This Totality Deep Dive for April 2026 is for general information and education purposes only, and does not take into account your personal circumstances, financial situation, objectives or needs. The contents should not be considered financial, investment, tax or other advice on which reliance could be placed and is warranted to be complete, accurate, or timely. No opinion given in the material constitutes a recommendation by Totality or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

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This Totality Deep Dive was produced by Totality Market Strategist Aaron Zanchetta.