Should I Invest In Commodities?
- dthenry5
- Oct 8
- 4 min read
The idea of investing in commodities (broadly defined, in my mind anyway, as stuff that comes out of the ground) existed well before stock and bond markets did.
Grains, salts and spices were traded by the Ancient Greeks and the Romans - in the 17th century the Dojima Rice Exchange allowed Samurai to purchase rice at a set price for delivery in the future, effectively inventing the concept of a futures exchange.
And investing in commodities, like investing in property in many ways, has its instinctive appeals.
These are tangible, useful assets that we can see and and use and feel. In an almost entirely financialised world, there is comfort in knowing that what I am buying is an actual thing.
So how can I do it?
You can invest in commodities in a bunch of ways, some rather more practical than others.
You can physically own the asset, whatever it is. A gold bar or a barrel of oil. As you can imagine this presents some difficulties.
As we have already seen, futures contracts are an option. You can buy a contract to take delivery of some quantity of a commodity in the future and hope to sell that contract at a profit to someone else if the price moves for you.
These are massively popular instruments, but really not suitable for retail speculators. It is important to remember that a futures contract represents an actual legal obligation to buy a given commodity at a specified point in time. As that point moves closer, the idea of taking delivery can become extremely unattractive - could you take delivery of ten tons of coal on your front lawn?
The easiest way for individual investors to invest in commodities is through an Exchange Traded Fund (ETF). These instruments rise and fall in value in line with the price of the underlying commodity, and the ETF’s shares trade on the stock exchange in the same way that company shares do so you can get in and get out whenever you like. If that’s your thing.
The final option would be to buy stock in a company that is a producer of the commodity you want to invest in. If you think the oil price is going up then you could buy shares in BP for example. These shares are tradable on an exchange and will often pay an attractive dividend.
But they don’t provide exact 1:1 exposure to the underlying commodity. BP for instance might have issues specific to them which means the company may do poorly and the share price falls, while the price of the thing they flog goes up.
Why would I do it?
Well as I said at the get go, these are useful assets which we need to keep the global economy firing. And the price of useful assets tends to go up over time.
The other primary reason one would consider investing in commodities is that they offer diversification within a portfolio.
The below table compares the performance of a simple 60% stock & 40% portfolio, with a portfolio incorporating 55% stock, 35% bond and 10% commodities allocation.
Including an allocation to commodities reduces both the volatility of the portfolio and the “worst case” maximum fall over the full period of available data (31st January 1992 to 5th October 2025).
There is a modest hit to the portfolio’s return, very modest as the chart below showing the performance of the two portfolios demonstrates.
But there is no doubt an allocation to commodities does “smooth” the journey a little.
Great I’m sold.
Steady on John.
I’ve written before about how I feel that for almost every private investor, allocating solely to bonds, cash and equities is perfectly fine. By including commodities, there is a very real risk we are trying to solve a problem which just doesn’t exist.
The other, fairly major, issue with investing in commodities is that you can’t really invest in them in the “buy and hold” sense.
Commodities go through long periods where they don’t work. Longer typically than equities and bonds.
If we look again at the first chart showing the long term return for the Bloomberg Commodity Index since 1992, we can see a long period from 2008 to 2022 where the index was underwater. Fourteen years.
The below table shows the percentage of five, seven and ten year periods within the full dataset where the commodity index generated a positive return.
Whether you have got a positive ten year return since 1992 has been a coin flip. That kind of success percentage is just way too low for me to recommend an investment into commodities for any client.
Nobody I know could stick with something that doesn’t work for ten years. I bet you wouldn’t be able to, I certainly couldn’t. History tells us that these kinds of “nuclear winters” for commodities as an asset class are relatively common as well.
My hunch as to why this is the case, is that commodities do not throw off a cashflow. Investors don’t receive an income “while they wait”, and therefore there isn’t such a natural underpin to the price.
Yes all commodities have practical use, that’s why they are a productive asset, but the price is solely defined by supply and demand. And demand can drop off for a long old time.
If “buying and holding” commodities often doesn’t work (or doesn’t work frequently enough to give us comfort) then we could try an approach of trading in and out of our commodity sleeve. Getting in when it is working, and getting out when it’s not.
But adopting such an approach would result in us having to take a view almost constantly. More decisions, greater likelihood of cocking it up.
And that isn’t what we are after.
Past performance is not indicative of future returns. None of the above is intended to constitute advice to any individual. If you have any queries regarding your individual situation, please consult with a regulated financial adviser.
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