Commodities are raw materials — energy, metals, agricultural products. They differ from equities and bonds in a way that matters: they generate no cash flow.
A share entitles the holder to a share of future profits. A bond pays interest. An ounce of metal pays nothing, costs money to store, and must be sold to realise any return. Its total return comes entirely from price change.
That is not an argument against holding them. It does mean the reasons for holding them need to be specific.
The case that works
Diversification against specific risks. Commodity prices are driven by supply and demand in physical markets, which is a different driver from corporate profits or interest rates. Over particular kinds of shock — supply disruptions, geopolitical events, a sustained rise in input prices — commodities can move against equities rather than with them.
Inflation linkage. Commodities are, in a sense, the things inflation is measured on. Energy and food prices are significant components of consumer price indices, so commodity prices tend to move alongside inflation rather than lagging it.
A store of value with no issuer. Gold in particular has no counterparty and no credit risk. It cannot default. Its value does not depend on any government's or company's promise. This is the reason central banks have held it for centuries, and it remains the most defensible case for holding it.
The case that does not hold
"It always goes up." It does not. Precious metals and commodities have had decades-long periods of flat or declining real prices.
"It is a hedge against everything." It is a hedge against some things. In a liquidity crisis, gold and commodities can fall alongside equities, because the need to raise cash dominates every other consideration.
"It protects against currency collapse." It may, in a currency's own terms, but the investing currency is usually not the collapsing one. An investor funding expenditure in a stable currency gets partial protection at best.
"It is a safe asset." Volatility in commodity markets is high, often exceeding equities. A safe asset is one whose nominal value is stable and whose liquidity is reliable. Most commodities meet neither test.
Gold specifically
Gold sits somewhere between a commodity and a currency. It is held rather than consumed, its industrial use is a small share of demand, and its price is driven substantially by the demand to hold it as a reserve.
Three observations that are usually correct:
- It tends to do well when real interest rates are low or negative, because the opportunity cost of holding an asset that pays nothing is then smallest.
- Its correlation with equities is low over long periods but unstable, and can rise during liquidity events.
- It produces nothing, so any return depends on someone else paying more later.
How an allocator might use them
- As a small, permanent allocation. A position sized to matter in a scenario but not to dominate the portfolio in normal conditions.
- Chosen by role, not by name. The relevant question is which risk the holding is meant to offset.
- Held with a reason to change. What would cause the position to be reduced? A change in the inflation regime, in real rates, or in correlation behaviour.
- Sized by volatility. Because commodity volatility is high, a position that looks small in capital terms may not be small in risk terms.
Commodities appear in Eonvera's research coverage alongside equities, fixed income, multi-asset portfolios and digital assets. As with the others, the holding follows from the objective and the risk budget rather than from a view about the next move in the price.