Should I Invest in Commodities? Complete 2025 Guide

You've watched gold surge 42% in 2025 to over $4,000 per ounce, seen energy stocks deliver 3.3% dividend yields while bonds struggle to keep pace with inflation, and heard endless debates about whether commodities deserve a place in modern portfolios. The question isn't just academic—it's about whether adding commodities could improve your returns, reduce risk, or protect against the inflation and uncertainty that have defined the 2020s.

Commodities represent a distinct asset class that behaves differently from stocks and bonds. They're physical goods—oil, gold, copper, wheat, natural gas—that power economies, feed populations, and build infrastructure. Unlike stocks that can go to zero or bonds that default, commodities maintain intrinsic value. But they're also volatile, don't generate income, and have long periods of poor performance. This comprehensive guide will help you determine whether commodities fit your portfolio, how much to allocate, which types to consider, and how to implement exposure effectively.

Should I Invest in Commodities? Quick Answer

The short answer: Yes, most diversified portfolios benefit from a 5-15% allocation to commodities, particularly in environments of elevated inflation, geopolitical uncertainty, or when traditional 60/40 stock-bond portfolios face challenges. Commodities provide diversification, inflation protection, and crisis hedging that stocks and bonds can't replicate. However, commodities are volatile, experience long drawdowns, and require understanding of which types to own and how to gain exposure (physical, futures, stocks, ETFs). They're portfolio complements, not replacements for core stock and bond holdings.

For most investors: A 5-10% allocation split between precious metals (gold/silver), energy (oil/natural gas), and broad commodity exposure provides meaningful diversification without excessive volatility. Higher allocations (10-15%) make sense if you're highly concerned about inflation or dollar depreciation. Avoid commodities if you need current income, can't tolerate volatility, or have very short time horizons under three years.

What Are Commodities and Why Do Investors Own Them?

Before deciding whether to invest, understanding what commodities are and their role in portfolios is essential.

The Main Commodity Categories

Energy Commodities:

• Crude oil (WTI, Brent)
• Natural gas
• Heating oil and gasoline
• Coal

These power transportation, heating, electricity generation, and manufacturing. Energy represents the largest weight in broad commodity indices (typically 40-60%).

Precious Metals:

• Gold
• Silver
• Platinum
• Palladium

Used for jewelry, investment, and industrial applications. Gold particularly serves as a monetary metal and store of value, up 42% in 2025.

Industrial Metals:

• Copper
• Aluminum
• Zinc
• Nickel

Essential for construction, manufacturing, electrical systems, and increasingly for renewable energy and electric vehicles.

Agricultural Commodities:

• Grains (corn, wheat, soybeans)
• Soft commodities (cotton, coffee, sugar, cocoa)
• Livestock (cattle, hogs)

Food and fiber commodities essential for feeding populations and manufacturing textiles.

The Core Reasons Investors Allocate to Commodities

1. Inflation Protection

This is commodities' primary value proposition. When inflation rises, commodity prices typically rise too—they're the actual goods whose prices constitute inflation. Research shows a 1 percentage point surprise increase in US inflation leads to a real return gain of 7 percentage points for commodities, while stocks and bonds decline 3-4 percentage points respectively.

Over the past twenty years, commodities have demonstrated this inflation-hedging property more reliably than stocks or bonds. Energy particularly generates the strongest real returns when inflation surprises to the upside.

2. Portfolio Diversification

Commodities historically show low or negative correlation with stocks and bonds, meaning they often move independently or oppositely to traditional assets. This low correlation reduces overall portfolio volatility—when stocks decline, commodities sometimes rise or hold steady, cushioning losses.

During the 2022 stock market decline, for example, commodities provided one of the few sources of positive returns, demonstrating this diversification value when it mattered most.

3. Dollar Depreciation Hedge

Commodities are typically priced in US dollars. When the dollar weakens, commodity prices often rise to compensate (all else equal). For dollar-based investors concerned about currency debasement, monetary policy, or excessive debt levels, commodities provide a hedge against dollar purchasing power decline.

4. Economic Recovery Plays

Industrial commodities particularly benefit from economic recovery and infrastructure investment. Copper, often called "Dr. Copper" for its predictive economic properties, rises during manufacturing booms and construction cycles. Investors anticipating economic acceleration often increase commodity exposure.

5. Supply Constraints and Scarcity

Unlike stocks (where companies can issue more shares) or bonds (where governments can issue more debt), physical commodity supply is constrained by geology, weather, and production capacity. Years of underinvestment in energy and mining have created supply constraints that could support prices even if demand growth moderates.

The Case FOR Investing in Commodities

Let's examine the strongest arguments supporting commodity allocation:

Argument 1: We're in an Inflationary Era

The 2020s have brought inflation back after decades of dormancy. Even as central banks fight inflation, tariff policies, deglobalization, fiscal spending, and tight labor markets keep inflation elevated above 2% targets. This environment favors commodity performance.

Looking historically from 1960 to today, the average 12-month return for the Bloomberg Commodity Index has been about 20% better when year-over-year inflation comes in above 2% (+15%) rather than below 2% (-5%). With inflation likely remaining above 2% for the foreseeable future, this creates a favorable backdrop.

Argument 2: Traditional 60/40 Portfolios Need Help

The classic 60% stock / 40% bond portfolio suffered in 2022 when both stocks and bonds declined together—a rare and painful occurrence that challenged conventional diversification. Adding commodities would have significantly cushioned losses.

When both stocks and bonds struggle in stagflationary environments (slow growth + high inflation), commodities often thrive. They provide an additional dimension of diversification beyond the stock-bond axis.

Argument 3: Commodity Valuations Are Reasonable

Despite 2025's 9% gain in the Bloomberg Commodity Index, many commodities remain well below inflation-adjusted historical highs. Oil at $64 is far below the inflation-adjusted peak of $160+. Many industrial metals trade below previous cycle highs. Agricultural commodities have been subdued for years.

This suggests significant upside potential if demand strengthens or supply remains constrained, making risk-reward attractive compared to historically expensive stock valuations.

Argument 4: The Energy Transition Paradox

While the shift to renewable energy is often cited as bearish for commodities, it actually requires massive amounts of copper, lithium, nickel, cobalt, and rare earth elements. Electric vehicles use 2-3x more copper than traditional vehicles. Solar panels, wind turbines, and grid infrastructure are commodity-intensive.

This creates a "green commodity supercycle" thesis where the transition itself drives sustained demand for industrial metals even as fossil fuel demand eventually moderates.

Argument 5: Geopolitical Fragmentation Supports Prices

Deglobalization, trade tensions, sanctions, and conflict create supply disruptions and discourage efficient global commodity flows. Countries increasingly prioritize security of supply over cost efficiency, supporting higher structural commodity prices.

Russia-Ukraine conflict effects on energy and agriculture, China-West tensions affecting rare earths and industrial metals, and Middle East instability impacting oil all exemplify how geopolitics now structurally supports commodity prices.

The Case AGAINST Investing in Commodities

Now let's examine the legitimate concerns and drawbacks of commodity investing:

Argument 1: No Income Generation

Unlike dividend-paying stocks or interest-bearing bonds, most commodity investments generate zero income. Gold sitting in a vault produces nothing. Oil futures in your portfolio pay no dividends. This means returns depend entirely on price appreciation.

For retirees or income-focused investors, this creates a significant disadvantage. You're allocating capital to an asset that doesn't help fund living expenses and must be sold (creating taxable events) to generate cash flow.

Argument 2: Extended Periods of Poor Performance

Commodities can underperform for a decade or more. From 2011 to 2020, the Bloomberg Commodity Index was essentially flat while stocks more than tripled. Investors who bought commodities near the 2011 peak endured a lost decade of opportunity cost.

This cyclicality means timing matters enormously. Buy at the wrong point in the cycle, and you might wait 10+ years just to break even while missing out on stock market gains.

Argument 3: High Volatility

Commodity prices can be extremely volatile. Silver dropped 13.5% in just 11 days in October 2025 (from $54 to $47). Oil went negative in April 2020. Agricultural commodities swing wildly based on weather and crop reports.

This volatility can be psychologically difficult and makes commodities unsuitable for short-term needs or risk-averse investors. The swings often exceed stock market volatility, despite commodities' reputation as tangible "safe" assets.

Argument 4: Complex Implementation

Gaining commodity exposure is more complicated than buying stocks or bonds:

• Physical commodities: Require storage, insurance, security, and liquidity concerns
• Futures contracts: Require understanding contango, backwardation, roll yield, and margin requirements
• Commodity ETFs: Suffer from tracking error, roll costs, and structure complexity
• Commodity stocks: Add company-specific risk on top of commodity exposure

Each implementation method has disadvantages that stocks and bonds don't face, creating hurdles for investors seeking simple, clean exposure.

Argument 5: Contango Drag in Futures-Based Products

Most commodity ETFs use futures contracts rather than physical commodities. When markets are in contango (normal condition where futures prices exceed spot prices), these ETFs suffer negative roll yield—they must continually sell expiring contracts at lower prices and buy distant contracts at higher prices.

This contango drag can erode 5-15% of returns annually in some commodity sectors, particularly natural gas and oil during supply-abundant periods. It means the ETF can significantly underperform the underlying commodity's spot price movement.

Argument 6: Each Commodity Faces Unique Supply-Demand Dynamics

To broadly state that commodities are great inflation hedges is not entirely correct. Over the long term, many commodities do not broadly hold up against inflation. Each commodity market reacts to its own idiosyncratic supply and demand circumstances.

This means you can't just "buy commodities" and expect good results—you need to understand individual markets, stay informed about supply-demand factors, and potentially rebalance exposure as conditions change. It's more active and complex than passive stock indexing.

How Much Should You Allocate to Commodities?

If you've decided commodities fit your portfolio, the allocation percentage matters enormously for balancing benefits against drawbacks.

Conservative Allocation: 5% of Portfolio

Best for: Risk-averse investors, retirees prioritizing income and stability, those new to commodities wanting to test the waters

Benefits: Provides meaningful diversification and inflation hedge without significantly impacting portfolio volatility. Small enough that even poor commodity performance won't devastate overall returns.

Drawbacks: Limited impact. If commodities rally 50%, a 5% allocation only adds 2.5% to portfolio returns. You get diversification but muted upside.

Moderate Allocation: 10% of Portfolio

Best for: Most investors seeking balanced portfolios, those moderately concerned about inflation, investors with 10+ year time horizons

Benefits: Substantial diversification and inflation protection. A 10% allocation meaningfully improves portfolio resilience during inflation or stagflation without excessive volatility contribution. This is often considered the "sweet spot" for commodity allocation.

Drawbacks: Noticeable drag if commodities underperform for extended periods. Requires rebalancing discipline to maintain target weight.

Aggressive Allocation: 15-20% of Portfolio

Best for: Inflation hawks, younger investors with long time horizons, those specifically betting on commodity supercycle, sophisticated investors understanding cycle timing

Benefits: Maximum inflation protection and diversification benefit. Significant gains if commodity bull market materializes. Strong protection against dollar depreciation and geopolitical shocks.

Drawbacks: Substantially increases portfolio volatility. Extended commodity bear markets create significant drag on overall returns. Requires strong conviction and discipline to maintain during underperformance.

Allocation by Investment Objective

Capital Preservation / Retirees: 5% allocation, focused on gold and precious metals for stability

Balanced Growth / Middle-aged Investors: 10% allocation, diversified across commodity categories

Aggressive Growth / Young Investors: 15% allocation, can include more volatile industrial metals and energy

Inflation Protection Focus: 12-15% allocation, emphasizing gold, energy, and industrial metals

How to Gain Commodity Exposure: Implementation Methods

Deciding to invest in commodities is only half the battle—you need to determine how to gain exposure. Each method has distinct advantages and disadvantages.

Method 1: Physical Commodities

What it is: Buying and storing actual gold bars, silver coins, or other physical commodities

Advantages:

• True ownership with zero counterparty risk
• Crisis protection—you physically possess the asset
• No management fees or ongoing costs beyond storage
• Privacy in some cases

Disadvantages:

• Storage costs, insurance, and security concerns
• Bid-ask spreads on purchase and sale (often 3-8%)
• Limited to precious metals and select commodities (can't easily store oil or wheat)
• Liquidity challenges—must physically sell and ship
• Purity verification requirements

Best for: Investors prioritizing true ownership of precious metals, those concerned about financial system stability, long-term holders not needing liquidity

Method 2: Commodity Futures Contracts

What it is: Trading standardized contracts for future commodity delivery on exchanges like CME

Advantages:

• Pure commodity price exposure without company-specific risk
• Highly liquid in major commodities
• Leverage available (can control large positions with modest capital)
• Access to full range of commodities

Disadvantages:

• Complex—requires understanding margin, contango, backwardation, and rolling contracts
• Risk of significant losses, especially with leverage
• Roll costs in contango markets erode returns
• Requires active management and monitoring
• Not suitable for passive, long-term investors

Best for: Sophisticated traders, institutional investors, those seeking leverage, active managers willing to monitor positions

Method 3: Commodity ETFs and ETNs

What it is: Exchange-traded funds or notes providing commodity exposure through futures or physical holdings

Examples:

• GLD, IAU: Physically-backed gold ETFs
• SLV: Physically-backed silver ETF
• USO: Oil futures-based ETF
• DBC, GSG: Broad commodity futures ETFs

Advantages:

• Simple to buy and sell like stocks
• Instant liquidity during market hours
• Low minimum investment (can buy single shares)
• Diversified exposure in broad commodity ETFs
• No storage or margin concerns

Disadvantages:

• Annual expense ratios (typically 0.4-0.75%)
• Futures-based ETFs suffer contango drag
• Tracking error—may not perfectly match commodity performance
• Counterparty risk (you own shares, not actual commodities)
• Tax treatment can be complex

Best for: Most individual investors, those seeking simplicity and liquidity, passive investors wanting diversified commodity exposure

Method 4: Commodity Producer Stocks

What it is: Buying shares in companies that produce commodities—mining companies, oil firms, agricultural producers

Advantages:

• Leveraged exposure—stock prices often amplify commodity price movements
• Dividend income (many commodity producers pay substantial dividends)
• Simpler than futures or physical ownership
• Potential for outperformance through company execution

Disadvantages:

• Company-specific risks (management, execution, financial structure)
• Imperfect commodity exposure—stocks correlate but don't match commodity prices
• Can underperform commodities during rallies
• Dividend cuts during commodity downturns compound losses

Best for: Investors wanting income, those comfortable with equity analysis, aggressive investors seeking amplified returns

Recommended Implementation for Most Investors

A diversified approach often works best:

• 40% in physically-backed precious metals ETFs (GLD/IAU for gold, SLV for silver): Provides stable, reliable precious metal exposure
• 30% in broad commodity ETFs (DBC, GSG): Diversified exposure across energy, agriculture, and industrial metals
• 30% in quality commodity producer stocks (Exxon, Chevron, Newmont, Freeport-McMoRan): Adds income and company-specific upside

This blend provides diversification across commodity types and implementation methods, balancing the advantages and disadvantages of each approach.

Common Mistakes When Investing in Commodities

Avoid these frequent errors that turn commodity investing from strategic allocation into costly speculation:

Mistake 1: Chasing Performance

The error: Buying commodities after they've already rallied 50-100% because they're "hot" and everyone's talking about them

Why it fails: Commodities are cyclical. Buying at cycle peaks means you endure the entire subsequent bear market, potentially waiting a decade to break even.

Better approach: Buy commodities when they're unloved and underperforming, not after they've made headlines with spectacular gains

Mistake 2: Over-Allocating

The error: Putting 25-40% of your portfolio into commodities because you're convinced a supercycle is coming

Why it fails: Even if you're right about the cycle, excessive concentration creates unbearable volatility and risk of catastrophic losses if you're wrong or mis-timed

Better approach: Maintain discipline with 5-15% allocation regardless of conviction level

Mistake 3: Ignoring Roll Yield and Contango

The error: Buying commodity ETFs without understanding their structure and being surprised when the ETF significantly underperforms the commodity's spot price

Why it fails: Contango costs can erode 5-15% annually, turning a 20% commodity gain into just 5-10% ETF gain

Better approach: Understand futures curve structure, prefer physically-backed ETFs where possible, or use stocks for exposure to commodities prone to severe contango

Mistake 4: Treating All Commodities as One Trade

The error: Assuming if you're bullish on "commodities," you should buy everything equally

Why it fails: Each commodity has unique supply-demand dynamics. Natural gas can plummet while oil rallies. Gold can surge while agricultural commodities decline.

Better approach: Understand the fundamental drivers of each commodity category and weight accordingly

Mistake 5: Neglecting Rebalancing

The error: Setting a commodity allocation and never adjusting it, allowing it to grow to 25% during rallies or shrink to 2% during downturns

Why it fails: This creates the opposite of what you want—large positions after rallies (expensive) and tiny positions after crashes (cheap)

Better approach: Rebalance annually or when allocation deviates 25%+ from target, forcing you to sell high and buy low

Why Commodity Allocation Matters for Your Portfolio

The inclusion or exclusion of commodities can significantly impact long-term portfolio outcomes:

• Inflation protection: A 1% inflation surprise generates 7% real returns for commodities versus -3% for stocks and -4% for bonds—a 10+ percentage point differential
• Crisis hedging: During the 2022 stock-bond correction, commodity exposure provided positive returns that cushioned portfolio losses by thousands of dollars on typical allocations
• Diversification math: Adding an asset class with low correlation to stocks and bonds mathematically reduces portfolio volatility—a 10% commodity allocation can reduce overall portfolio standard deviation by 1-2 percentage points
• Long-term returns: While commodities underperform stocks over ultra-long periods, they outperform during specific decades (1970s, 2000s, potentially 2020s), making them valuable for retirees or investors without 50-year time horizons
• Dollar protection: For investors concerned about currency debasement from massive debt and monetary expansion, commodities provide tangible asset exposure that maintains purchasing power better than cash or bonds

The 2025 Outlook: Should You Invest in Commodities Now?

Given current market conditions in late 2025, let's evaluate whether commodities represent an attractive investment opportunity.

Bullish Factors Supporting Commodity Investment

• Inflation remains elevated above 2% targets, with tariff policy expected to keep it elevated—favorable environment for commodities
• Bloomberg Commodity Index up only 9% in 2025 after years of underperformance—not overextended relative to historical standards
• Years of underinvestment in energy and mining create structural supply constraints that could support prices for years
• Geopolitical fragmentation, deglobalization, and conflict risk remain elevated, supporting risk premiums in commodity prices
• Energy transition requires massive amounts of copper, lithium, and industrial metals, creating long-term demand support
• Renewed interest from market participants seeking diversification and inflation hedging as traditional 60/40 portfolios struggle

Bearish Factors Creating Caution

• Oil inventories rising faster than demand, with prices forecast to decline to $50-55 in 2026
• Gold at $4,000+ represents record highs—some consolidation or correction likely before further gains
• Global economic growth concerns could pressure demand for industrial commodities
• Dollar strength (if it materializes) would pressure dollar-denominated commodity prices
• Agricultural commodities have been subdued for years and face climate unpredictability

Recommended Approach for Late 2025

If you currently have zero commodity exposure: Begin building a position toward your target allocation using dollar-cost averaging over 6-12 months. Don't wait for perfect timing—the diversification and inflation protection benefits justify starting positions even if some near-term volatility occurs.

If you're underweight commodities (less than 5%): Increase allocation to at least 5-10%, focusing on physically-backed gold ETFs (GLD/IAU) for stability and broad commodity exposure (DBC) for diversification.

If you're at target allocation (5-15%): Maintain positions through rebalancing. Don't add significantly at current levels but don't reduce either. Let your systematic rebalancing framework make decisions.

If you're overweight commodities (above 20%): Consider trimming back to your target range, especially if commodities have appreciated significantly in your portfolio. Take some profits while maintaining strategic exposure.

Key Takeaways: Should You Invest in Commodities?

1. Most portfolios benefit from 5-15% commodity allocation: Provides meaningful diversification, inflation protection, and crisis hedging without excessive volatility
2. Commodities shine during inflation: Generate 7% real returns per 1% inflation surprise while stocks and bonds decline, making them essential inflation hedges
3. Don't expect consistent returns: Commodities experience extended underperformance periods but excel during specific decades, particularly inflationary or stagflationary environments
4. Implementation method matters: Physically-backed ETFs (GLD, SLV) avoid contango drag, while futures-based ETFs suffer from roll costs in many commodities
5. Diversify across commodity types: Split exposure between precious metals (40%), broad commodity ETFs (30%), and producer stocks (30%) for balanced exposure
6. Buy when unloved, not when hot: Commodity cycles reward contrarian timing—buy during underperformance, not after headlines tout spectacular gains
7. Rebalance systematically: Annual rebalancing forces profitable buy-low-sell-high behavior without requiring perfect market timing
8. Current environment is reasonably supportive: Elevated inflation, geopolitical risks, and structural supply constraints favor commodity exposure in 2025-2026
9. Commodities complement, not replace stocks and bonds: They're portfolio diversifiers, not core holdings—maintain appropriate allocation discipline
10. Avoid common mistakes: Don't chase performance, over-allocate, ignore contango costs, treat all commodities identically, or neglect rebalancing

Conclusion: A Strategic Allocation for Most Investors

The question "should I invest in commodities?" has a nuanced but generally affirmative answer for most diversified investors. Commodities provide benefits—inflation protection, diversification, dollar hedge, crisis insurance—that stocks and bonds can't replicate. These benefits become especially valuable during periods like the 2020s when inflation has returned and traditional portfolio construction faces challenges.

However, commodities aren't magic. They experience extended drawdowns, generate no income, require more complex implementation, and can underperform for a decade or more. They're not appropriate as core holdings, and excessive allocation creates more problems than it solves.

The sweet spot for most investors is a 5-15% allocation, implemented through a combination of physically-backed precious metals ETFs, broad commodity ETFs, and quality producer stocks. This provides meaningful exposure to commodities' benefits while limiting their drawbacks. More conservative investors might start at 5%, while those particularly concerned about inflation or seeking maximum diversification might push toward 15%.

As of late 2025, with inflation remaining elevated, geopolitical tensions persistent, and commodities having posted modest but not excessive gains, the environment remains supportive of commodity exposure. Investors without commodity allocations should consider adding them, while those already positioned should maintain their strategic allocations through disciplined rebalancing.

Ultimately, commodity investing is about insurance and diversification, not speculation. Include commodities in your portfolio not because you're trying to predict the next supercycle, but because you recognize they provide protection and balance that improves risk-adjusted returns across full market cycles. This defensive, strategic rationale leads to better outcomes than aggressive, speculative commodity timing attempts.

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. Commodities are volatile investments that can result in significant losses. Past performance does not guarantee future results. Commodity prices are affected by numerous factors including weather, geopolitics, currency movements, supply and demand dynamics, and economic conditions that are difficult to predict. Different commodities have different risk profiles. Futures trading, physical commodity ownership, ETFs, and commodity stocks each have unique risks and tax implications. Consult with qualified financial advisors, tax professionals, and investment advisors before making investment decisions. Different investors have different circumstances, risk tolerances, time horizons, and goals that may make commodities appropriate or inappropriate for their situation. This article does not constitute a recommendation to buy or sell any specific commodity, security, or investment product.