Geopolitical tension, fiscal expansion, and persistent questions about long-run inflation have renewed investor interest in commodities and real assets. The asset class rewards careful thinking about what role it is meant to play in a portfolio, because owning real assets for the wrong reason tends to end badly even when the assets themselves perform.
For ultra-high-net-worth families and the family offices that serve them, the question is rarely whether commodities can rise. It is whether a measured real asset allocation can protect the broader balance sheet in the specific scenarios that would damage everything else. This framework is intended to help families and their advisors think through that question with discipline: what commodities have historically done, why the current environment invites renewed attention, where the risks sit, how exposure can be implemented, how taxes change the arithmetic, and how a defensive framing may produce allocations investors can hold through a full cycle.
Why Commodities Occupy an Unusual Place in Portfolio Theory
Commodities generate no cash flow, pay no dividend, and produce nothing on their own. A barrel of oil or a bar of gold simply sits there until someone pays more or less for it. Over long stretches, commodity returns have trailed productive assets such as equities and real estate, which is exactly what theory predicts for assets without earnings. An investor who buys a commodity is not purchasing a stream of future profits; the investor is purchasing a claim on a physical good whose price is set by the balance of supply and demand, the level of interest rates, the strength of the dollar, and the mood of the moment.
Commodities often persist in serious portfolios due to their unique risk-return characteristics. They have historically shown a tendency to perform when much else does not. In portfolio construction terms, the asset class has been valued less for its average return than for the shape of its return distribution relative to stocks and bonds. That distinction matters because it reframes the entire allocation decision from “how much can this earn” to “what can this protect.”
What Commodities Have Historically Done for Diversified Portfolios
The tendency to perform when other assets struggle has specific shapes. Commodity returns have historically clustered around three environments:
- Inflation surprises. When realized inflation exceeds what markets had priced, commodities have often responded quickly because they are, in a literal sense, the inputs whose prices are rising.
- Supply shocks. Wars, embargoes, weather events, and production disruptions tend to lift commodity prices at precisely the moments they pressure corporate margins and consumer confidence.
- Currency stress. Periods of dollar weakness or broader concern about fiat currencies have historically coincided with strength in gold and, to a lesser degree, broad commodities.
These are the precise environments in which conventional stock and bond portfolios have tended to struggle together. The painful 2022 experience, when equities and bonds declined simultaneously while broad commodity indices advanced, reminded a generation of investors why the asset class survives every cycle of being declared obsolete. Many portfolios built on the assumption that bonds would cushion equity losses discovered that the negative correlation between stocks and bonds is a regime, not a law. Real assets were among the few liquid exposures that behaved as a diversifier that year.
The lesson generalizes beyond a single year. Commodity value is less about how much the asset class returns than about when those returns tend to arrive. For a family whose wealth is concentrated in equity markets, an operating business, or real estate, that timing characteristic can be worth more than the long-run return figure suggests.
The Case for Real Assets in the Current Environment
The current environment supplies plausible arguments on both sides of the commodity question, and intellectual honesty requires hearing both. The case for a real asset allocation rests on three pillars.
Sovereign Debt, Fiscal Deficits, and the Currency Debasement Precedent
Sovereign debt loads across developed economies sit at levels with few peacetime precedents. Fiscal deficits persist through economic expansions, when history suggests they should narrow, and the political appetite for restraint appears limited on both sides of the aisle in nearly every major democracy. Investors who study monetary history recognize this pattern as one that has often resolved through currency debasement, whether through elevated inflation, financial repression, or both.
That is an environment in which real assets, and gold in particular, have historically held appeal as a store of value outside the fiat system. Central bank gold purchases, which have been at elevated levels for several consecutive years, indicate a trend in official institutions’ investment strategies. When the entities that issue currency accumulate an asset that is not currency, private investors may reasonably take note.
The Energy Transition and Structural Demand for Critical Minerals
The energy transition adds a structural demand argument that did not exist in prior commodity cycles. Electrification of transportation, expansion and hardening of electrical grids, buildout of renewable generation, and the power requirements of data centers together require copper, lithium, nickel, cobalt, uranium, and a range of materials whose supply responds slowly. New mines can take a decade or more to permit, finance, and develop. Existing deposits are depleting in grade. Structural demand meeting inelastic supply is the classic setup for an extended commodity cycle.
That said, the timing of such cycles has humbled forecasters reliably. Demand projections have been revised in both directions, substitution and recycling can soften shortages, and policy shifts can alter the trajectory of transition spending. The structural thesis may be sound while the timing remains uncertain, which is itself an argument for measured rather than concentrated positioning.
Geopolitical Fragmentation and Supply Chain Realignment
The reorganization of global trade around security considerations rather than pure efficiency has introduced new friction into the movement of raw materials. Export controls, tariffs, resource nationalism, and the onshoring of strategic industries can create regional shortages and price dislocations even when global supply is adequate. For investors, this fragmentation tends to raise the frequency of the supply shocks that commodities have historically responded to.
The Case Against: Volatility, Roll Costs, and Long Flat Stretches
The arguments on the other side deserve equal weight, because they explain why many thoughtful investors hold no commodity exposure at all.
Commodity Volatility and Drawdowns
Commodities are brutally volatile, with drawdowns that can exceed equity bear markets in both depth and duration. Broad commodity indices have experienced peak-to-trough declines of well over half their value in prior cycles, and individual commodities routinely move 30 to 50 percent in a single year. An allocation sized without respect for that volatility can inflict damage on the total portfolio that overwhelms any diversification benefit.
Roll Yield, Contango, and the Cost of Futures-Based Exposure
Futures-based implementations carry roll costs that can quietly erode returns for years. When a commodity market is in contango, meaning futures contracts for later delivery trade above the spot price, an index that continually sells expiring contracts and buys the next month pays a spread each time it rolls. That negative roll yield can consume several percentage points annually, causing a futures index to lag the spot commodity materially over time. In backwardation the effect reverses and roll yield becomes a source of return, but investors cannot rely on which state prevails. This is one reason a headline about oil prices rising can coexist with a commodity fund that has barely moved.
The Long Flat Decade
Allocation to long flat stretches, which can last for a decade, may require a certain level of patience. The period from roughly 2011 through 2020 saw broad commodity indices decline while equities compounded at historically strong rates. Families who entered commodities after the 2000s supercycle and exited in frustration a decade later often did so shortly before the asset class delivered the protection it had been purchased for. Behavioral risk, the risk that an investor abandons a position before it does its job, is arguably the largest risk in commodity allocation.
The Limits of the Inflation-Hedge Argument
The inflation-hedging story, while real in surprise scenarios, is weaker against the slow, anticipated inflation that markets price in advance. Commodities respond to inflation that catches markets off guard; they have a less consistent record against inflation that everyone expects, which tends to be reflected in bond yields, wages, and equity prices well before it shows up in commodity spot markets. An investor seeking protection against a gradual erosion of purchasing power may find that Treasury Inflation-Protected Securities, real estate, or equities with pricing power address that need more directly.
Implementation: How Real Asset Exposure Can Be Expressed
Implementation choices matter as much as the allocation decision itself, because the same thesis can be expressed in profoundly different instruments, each with its own return drivers, correlation profile, liquidity, and tax character.
| Implementation Path | What It Provides | Principal Trade-Offs |
|---|---|---|
| Broad commodity futures indices | Diversified exposure across energy, metals, and agriculture; daily liquidity | Roll costs in contango; high volatility; collateral yield matters |
| Gold (physical or fund) | Has a history as a store of value, similar to commodities | No yield; sensitive to real rates and dollar; concentrated single-asset risk |
| Natural resource equities | Operating leverage to commodity prices; dividend income; familiar structure | Equity correlation dilutes diversification; company-specific and management risk |
| Private real assets | Cash-flowing exposure through infrastructure, timberland, farmland, royalties | Illiquidity; manager selection risk; longer commitment horizons |
Broad Commodity Futures Indices
Diversified futures indices are commonly used to express the commodity thesis. They provide exposure to energy, industrial and precious metals, and agriculture in a single vehicle with daily liquidity. The trade-off is that roll mechanics demand attention, and the choice of index methodology, including how it weights sectors and when it rolls contracts, can produce very different outcomes from the same underlying commodity moves. Enhanced-roll and dynamic-roll strategies attempt to mitigate contango drag, with varying success.
Gold as an Alternative Currency
Gold, held directly or through funds, behaves less like a commodity and more like an alternative currency, with its own drivers. Its price has historically been sensitive to real interest rates, the direction of the dollar, and demand from central banks and households in emerging economies. Gold tends to be the real asset that responds to financial system stress rather than industrial demand, which makes it a distinct allocation from broad commodities rather than a substitute for them.
Natural Resource Equities
Shares of energy producers, miners, and agricultural companies add operating leverage and equity correlation. When commodity prices rise, producer margins can expand faster than the underlying commodity, and many of these companies pay meaningful dividends. The cost is that resource equities are still equities. In a broad market selloff they tend to fall with everything else, diluting the diversification benefit that motivated the allocation. They may be better understood as an equity sector tilt than as a real asset hedge.
Private Real Asset Strategies
Private strategies, from energy infrastructure to timberland to farmland to mining and mineral royalties, offer cash-flowing exposure to real assets at the cost of illiquidity and manager risk. For families with long horizons and limited liquidity needs, these strategies can potentially offer inflation-linked income streams, which may differ from those provided by public commodity futures. Access, due diligence, and fee structures require the same rigor applied to any private markets allocation.
Tax Considerations for Taxable Families
Tax treatment differs across each implementation path, and for taxable families those differences can rival the gross return differences between implementations. An allocation designed without the tax dimension is half designed. The following general observations are educational and are not a substitute for advice from a qualified tax professional who understands a family’s specific situation.
- Futures-based funds. Regulated futures contracts held directly are generally subject to Section 1256 treatment, with gains and losses marked to market annually and taxed 60 percent long-term and 40 percent short-term regardless of holding period. Funds that access futures through offshore subsidiaries or other structures may instead generate ordinary income reported on a 1099, while partnership-structured products may issue a Schedule K-1 with its own complexity.
- Physical gold and grantor trust vehicles. Physical precious metals and trusts that hold them are generally treated as collectibles, and long-term gains may be taxed at a federal rate of up to 28 percent rather than the lower rate that generally applies to long-term capital gains on securities.
- Natural resource equities. These generally receive conventional capital gains treatment, and dividends may qualify for preferential rates, making them among the more tax-efficient ways to express a resource view in a taxable account.
- Private real asset structures. Partnership structures typically issue K-1s, may generate income in multiple states, and can carry features such as depletion allowances in energy or favorable timber gain treatment. For foundations, IRAs, and other tax-exempt accounts, exposure to unrelated business taxable income requires attention.
Asset location follows from these distinctions. Tax-inefficient exposures may be better positioned in retirement accounts, charitable vehicles, or entities where the character of income matters less, while tax-efficient expressions may sit in taxable accounts. The right answer depends on the family’s entity structure, state residency, charitable intentions, and estate plan, which is why commodity implementation is properly a wealth-planning decision rather than an investment decision alone.
A Defensive Framework: Sizing Real Assets to the Risk Being Hedged
For families with substantial wealth, the more useful framing may be defensive rather than opportunistic. Rather than asking whether commodities look attractive this year, a family might ask: what scenarios would damage the rest of the portfolio and the family’s broader balance sheet, and could a measured real asset allocation soften those specific scenarios?
That question tends to produce different answers for different families. A family whose wealth is concentrated in a technology company may find that gold and broad commodities offer diversification against the rising-rate, rising-inflation environment that has historically compressed growth equity valuations. A family with extensive real estate holdings may already carry substantial real asset exposure and require less. A family heavily weighted toward fixed income for spending needs may be more exposed to inflation surprises than it realizes, and a real asset sleeve may address that directly.
Approached this way, commodities become a deliberate insurance decision with several defining characteristics:
- Sized to the risk being hedged rather than to a return forecast. The allocation is large enough to matter in the adverse scenario and small enough that its volatility does not dominate the total portfolio.
- Held with predefined patience. The investment policy statement articulates in advance the conditions under which the allocation would be revisited, so that a flat decade does not become an exit triggered by frustration.
- Rebalanced systematically. Commodity volatility is a feature that disciplined rebalancing can harvest, trimming after sharp advances and adding after declines, rather than a defect to be endured.
- Judged by the protection offered rather than the quarter’s return. The relevant question in any review is not whether commodities beat equities but whether the allocation is still positioned to do its job in the scenario it was purchased for.
The choice of framing can influence the types of allocations that investors may be comfortable with, which can contribute to the potential success of an allocation. Real assets that are abandoned in a drawdown provide no protection; real assets that are held through the cycle with a clear purpose have historically earned their place.
Frequently Asked Questions About Commodities and Real Assets
Are commodities a good inflation hedge?
Commodities have historically responded well to inflation surprises and supply shocks, and less consistently to slow, anticipated inflation that markets price in advance. They tend to be a hedge against a specific kind of inflation rather than against rising prices in general.
How much of a portfolio should be allocated to commodities or real assets?
There is no universal figure. Sizing depends on what the allocation is meant to protect against, the family’s existing exposure to real assets through real estate or operating businesses, liquidity needs, and tax posture. Many institutional frameworks consider modest single-digit to low double-digit percentages, sized so that commodity volatility does not dominate total portfolio risk.
Is gold a commodity or a currency?
Gold trades as a commodity but has historically behaved more like an alternative currency. Its price tends to respond to real interest rates, dollar strength, and financial system stress rather than industrial demand, which is why many allocators treat gold as a separate line item from broad commodities.
What is roll yield and why does it matter for commodity funds?
Roll yield is the gain or loss a futures-based fund experiences when it sells an expiring contract and buys a later one. In contango, later contracts cost more and the fund pays a spread each roll, which can erode returns over time. In backwardation, the effect reverses. This mechanic explains why a commodity fund’s return can differ substantially from the spot price of the commodities it tracks.
How are commodity investments taxed?
Tax treatment varies by vehicle. Futures contracts may receive Section 1256 blended treatment, physical gold and gold trusts may be taxed as collectibles, resource equities generally receive conventional capital gains treatment, and private structures typically issue K-1s. Families should consult a qualified tax advisor before implementing.
How Certuity Approaches Real Assets
At Certuity, real asset allocations are considered within the context of a family’s entire balance sheet, including concentrated positions, operating businesses, real estate, and the tax and estate structures that hold them. Our investment, tax, and family office teams work together so that the implementation path, vehicle selection, and asset location reflect the family’s specific risks rather than a generic model. Families interested in discussing whether a real asset allocation fits their circumstances are welcome to contact our team.
Disclosures: This material is provided for educational and informational purposes and does not constitute investment, tax, or legal advice, nor an offer or solicitation to buy or sell any security. Certuity, LLC is a fee-only registered investment adviser. Registration does not imply a certain level of skill or training. Past performance is not indicative of future results. Commodity and real asset investments involve substantial risk, including the potential loss of principal. Discussion of historical market behavior reflects general observations and should not be interpreted as a prediction. Investors should consult their own tax and legal professionals regarding their individual circumstances.