Commodities are often dismissed as a hedge rather than an investment.
But over the last ten years, the return from the broad basket of futures that makes up the Bloomberg Commodity Index has beaten sterling cash by an average of 6% per annum.
In contrast, ten-year gilts have underperformed cash by 1% to 2% per annum, with losses concentrated in the bond crash of 2022. This is no coincidence.
In a world where inflation spikes are possible, commodities can provide greater resilience than the so-called risk-free assets. With equity markets sitting at all-time highs and geopolitical risk on the rise, the case for inclusion is more relevant than ever.
Commodities began the year with strong momentum, supported by elevated geopolitical risk and a weaker dollar.
Precious metals grabbed most of the headlines. Gold extended the powerful rally that saw it more than double in value since mid 2024 and rise over 66% last year, briefly pushing above $5,500/oz before pulling back. Silver, true to form, was like gold on steroids.
With stock markets pushing into all‑time‑high territory, the question investors should be asking is what’s hedging their equity risk
The pace of appreciation in January made us wonder if bitcoin traders had arrived. Volatility remains high, but gold’s role as a political hedge is likely to remain a ‘thing’ at least until the US mid-term elections in November.
Chart 1: Sterling based annual asset class returns
Commodities have long demonstrated their ability to hedge both inflation and geopolitical risk, offering protection at precisely the moments when both stocks and bonds can struggle.
Commodities can act as a kind of anti-bond during inflationary spikes, as we saw in the post-Covid recovery over 2021 and 2022 (Chart 1). As you might expect, commodities have delivered their strongest returns when inflation has been highest (Chart 2).
Chart 2: Commodity returns based on inflation regime
Periods of geopolitical tension, which can lead to volatility in equity markets, can provide a boost to commodity markets.
Over the last month we have seen this effect, as geopolitical uncertainty relating to Venezuela, Greenland and the Middle East has boosted precious metals and energy prices. With president Trump in the White House, it does not seem like geopolitical risk is going to normalise any time soon.
With stock markets pushing into all‑time‑high territory, the question investors should be asking is what’s hedging their equity risk.
For years, balanced funds relied on bonds as the default offset but that relationship has fundamentally changed. The equity–bond correlation is no longer reliably negative; in fact, in recent years it has drifted positive.
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The 2022 inflation shock was the clearest sign: interest rates surged, equities sold off and bonds fell at the same time. The bond hedge failed, but commodities delivered.
On the face of it, commodities are a risky asset class prone to large swings at the individual commodity level. However, a broad commodity index exhibits volatility that is similar to equities.
Moreover, the low correlation between commodities and other asset classes means you can add a few percentage points of exposure to a multi-asset portfolio without any meaningful impact on overall risk.
Chart 3: Long-term correlation of stocks and bonds
Strategically, we’ve always believed commodities deserve a permanent seat at the table in a genuinely diversified multi-asset portfolio. The ability to hedge inflation, absorb geopolitical shocks and behave differently from traditional assets has been central to our philosophy.
Structural changes in the world economy over the last few years – high debt levels, populism, deglobalisation and supply constraints on the journey to net zero – have strengthened our conviction.
Trevor Greetham is head of multi asset at Royal London Asset Management