Commodities and Gold

Commodities are the most tangible asset class: oil, natural gas, copper, aluminium, wheat, coffee, gold, silver. No factory, car or heating system runs without them. Yet they differ fundamentally from stocks and bonds – with consequences for anyone who wants to invest in them.

Commodities don’t work for you#

A stock represents a business that earns profits. A bond pays interest. A bar of copper just sits there. It produces nothing, pays nothing and even costs money to store and insure. A commodity’s return comes only from price changes – driven by supply and demand: the economy, weather, wars, production quotas, technological shifts.

That’s why commodities have delivered far less real (after-inflation) growth than stocks over very long periods. Their strength lies elsewhere: they respond to different forces than stocks and can surge in certain phases – such as the inflation shock of 2021–22 – while stocks and bonds suffer.

How commodities trade: futures#

Few investors want 1,000 barrels of oil in the basement. Commodities trade mostly through futures: agreements to buy or sell a set quantity at a fixed price on a future date. An oil producer can lock in its selling price, an airline its jet fuel cost.

For fund investors this has a key consequence: futures expire. A fund must sell the expiring contract and buy a later one in time – it rolls.

• In contango, later contracts cost more than earlier ones – storage and financing aren’t free. A fund sells cheap and buys dear. Even if oil stays flat, it loses value.
• In backwardation it’s the other way round: later contracts are cheaper, typically when supply is tight right now. Then the fund earns from rolling.

How to invest#

Gold: the odd one out#

Gold behaves differently from nearly every other commodity. It is hardly consumed – almost all the gold ever mined still exists, mostly as jewellery, bars or central bank reserves. The gold price therefore depends less on industry than on how much people and institutions want to hold it.

The main drivers:

• Real interest rates: Gold pays no interest. When safe bonds yield little or nothing after inflation, it costs little to hold gold instead. Rising real rates often weigh on gold.
• Crises and distrust: In periods of political uncertainty, banking stress or currency worries, gold is treated as a safe haven.
• Central banks: Since the mid-2010s, and especially since 2022, central banks – mainly in emerging markets – have bought gold on a large scale, partly to reduce reliance on US dollar reserves.
• The US dollar: Gold is priced in dollars. A weaker dollar makes it cheaper for buyers elsewhere.

What role can commodities play?#

Commodities are not a return engine like stocks. Their potential job is diversification: they sometimes move differently from stocks and bonds, especially during supply shocks and inflation spikes. Many long-term investors therefore hold, if anything, a small allocation of around 5 to 10% in gold, and rarely broad commodity indices.

Summary#

Commodities produce nothing. Their return comes from price changes only, and investors usually reach them through futures, whose rolling can cost or add return. Gold is special: a store of value driven mainly by real rates, crises and central banks. As a small allocation it can steady a portfolio – as a substitute for stocks it fails.