Most investors have probably never fretted about how to add a nice stake in pork bellies or winter wheat to their portfolio. But many have lined up in Costco to buy a gold bar. All such investments are part of the broad asset class of commodities, along with crude oil, coffee, copper and more. Despite impressive run-ups in many commodities this year, some strategists say they’ve still got a long, upward run ahead of them and deserve a spot in your portfolio.
That’s because commodity prices tend to ebb and flow in long cycles, largely governed by human nature, says John LaForge, head of real asset strategy at Wells Fargo Investment Institute. Commodity producers ramp up production when prices are rising, until eventually markets are saturated, or at least so well stocked that profits start to suffer. “It gets to a point where producers aren’t interested in planting an extra acre of corn or producing an extra barrel of oil,” says LaForge.
Producers then scale back until all that excess supply is worked off. With commodities once more in short supply, prices start to rise again and the cycle repeats. These bull and bear cycles tend to last roughly 10 to 15 years, on average, says LaForge. Currently, “we’re in year four of a bull super cycle” that began in March 2020, he says.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
"Very positive" outlook for commodities
Shorter-term developments also affect the price of commodities — harsh weather, supply-chain snafus, geopolitical tensions or spikes in inflation, for example — which is why, within a super cycle’s long-term trend, commodities can be volatile.
Jim Masturzo, chief investment officer of multi-asset strategies at money management firm Research Affiliates, sees several factors pointing to a “very positive” outlook for commodities. They include robust growth in commodity-intensive areas of the economy such as green energy and artificial intelligence, higher-for-longer U.S. inflation, and expectations for an eventual weakening of the dollar. (Commodities, generally priced in dollars, typically move in the opposite direction of the greenback.)
Commodities can be effective portfolio diversifiers. “Commodities offer diversification from regular stocks and bonds,” Masturzo says. “A perfect example is 2022 — every major asset class was negative as inflation was rising, except commodities.”
How to own commodities
Outside of gold, it’s almost impossible to invest in commodities directly. Most of the time, you’re investing in derivative instruments, such as futures contracts, that track the price of a commodity (sometimes more closely than other times). Or you can invest in stocks linked to commodities.
There are pluses and minuses to each approach depending on a number of variables. How much to allocate to commodities overall depends on your risk tolerance, but you’ll likely need 5% to 10% to realize the diversification benefits, strategists say.
Gold shines brightly among commodities lately. “We’ve been broadly bullish on commodities for some time, especially on precious metals,” says Mayukh Poddar, senior portfolio manager at Altfest Personal Wealth Management. Geopolitical tensions and ongoing inflation angst are positives, and gold is getting a boost from foreign governments increasingly deploying excess reserves into gold, he says.
“Generally speaking, we prefer the metal; the stocks of miners are more volatile,” Poddar says, although the firm invests some in the latter, which are well priced now. Exchange-traded funds are good choices. Poddar prefers low-cost SPDR Gold MiniShares (GLDM, $46), backed by physical bullion. For a broader basket of precious metals, he likes abrdn Physical Precious Metals Basket Shares (GLTR, $104), offering exposure to gold, silver, platinum and palladium. (Prices, returns and other data are as of May 31, unless otherwise noted.)
Long-term investors shouldn’t be put off by gold’s huge gain. The metal rallied from roughly $1,820 an ounce last October to around $2,325 recently, down from an all-time high in May of $2,435. “That’s not extreme, particularly in a bull super cycle,” says LaForge. A pause to consolidate gains shouldn’t be surprising, he says. But LaForge sees gold trading at more than $2,500 per ounce in 2025.
Gold-mining stocks have conspicuously lagged the metal’s blockbuster rally, making them compelling now for tactical investors who can stomach their volatility. “Gold stocks seem to be stuck in neutral, which is uncharacteristic — they typically outperform the metal in a bull phase,” says John Hathaway, senior portfolio manager at Sprott Asset Management, an investment firm specializing in precious metals. Intrepid investors seeking exposure to mining stocks can consider VanEck Gold Miners (GDX, $35), an ETF whose top three holdings are Newmont (NEM), Agnico Eagle Mines (AEM) and Barrick Gold (GOLD).
Crude oil has been on more of a roller coaster. Having briefly traded below $0 in 2020 when COVID decimated demand, oil rebounded to over $120 a barrel in 2022 as Russia’s invasion of Ukraine upended supplies and has now fallen back to below $80 a barrel. LaForge sees modest gains, to $85 a barrel, in 2025. “Oil needed to cool down a bit,” he says. “Even in bull cycles, prices don’t skyrocket higher every year.”
In contrast to their gold strategy, when it comes to energy, the portfolio managers at Altfest prefer stocks to the commodity itself. (Strategists at Wells Fargo also recommend that stock investors overweight the sector in their portfolios.) If oil stays within a stable range, says Altfest’s Poddar, energy producers and related firms should earn reasonable profits. He finds attractive valuations among the integrated giants, including ExxonMobil (XOM) and Chevron (CVX), which are the top holdings in Energy Select Sector SPDR (XLE, $93).
But before you zero in on one particular commodity, consider whether a broader approach may suit you better. Although some parts of the commodities complex might be more attractive than others at any given time, investors need not stress over picking the standouts.
“A broad basket is best,” says LaForge. The reason, he says, is that in a bullish super cycle, a rising tide tends to lift all boats — about 90% of commodities move in the same direction in a super cycle, whether bull or bear, he notes. “If investors try to get too cute and pick that one commodity, it could be the one of 10 that doesn’t participate.”
A broad ETF worth exploring, according to Poddar, is Invesco Optimum Yield Diversified Commodity Strategy No K-1 (PDBC, $14). The actively managed ETF invests across energy precious metals, industrial metals and agriculture sectors. As its name implies, does not issue pesky K-1 forms at tax time.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
Related content
-
The Role of the U.S. Dollar in Retirement: Is It Secure?Protect your retirement from de-dollarization, because “capital always goes where it is treated best."
-
Retire in France for Beauty and CultureFrance offers a great history and a slower pace of life for retirees. At times, it can feel like stepping into a postcard.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
When to Sell Your StockKnowing when to sell a stock is a major decision investors must make. While there's no one correct answer, we look at some best practices here.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
-
The Home Stretch: Seven Essential Steps for Pre-RetireesThe decade before retirement is the home stretch in the race to quit work — but there are crucial financial decisions to make before you reach the finish line.
-
Stock Market Today: Great Power Affairs Mesmerize MarketsThe U.S. and China are at least talking about talking about tariffs, and investors, traders and speculators are showing a little less fear.
-
Three Options for Retirees With Concentrated Stock PositionsIf a significant chunk of your portfolio is tied up in a single stock, you'll need to make sure it won't disrupt your retirement and legacy goals. Here's how.
-
Four Reasons It May Be Time to Shop for New InsuranceYou may be unhappy with your insurance for any number of reasons, so once you've decided to shop, what is appropriate (or inappropriate) timing?
