Why asset owner investment in commodities may be ‘self-defeating’
We seem to be living through a boom time for commodities, with the price of gold breaking the $5,000 barrier for the first time. But as commodity markets become dominated by institutional investors, this may have unintended consequences (Reuters/Hiba Kola)
Everywhere you look, it seems commodities are having a bit of a renaissance. The price of gold rose by 64 per cent in 2025 and earlier this week went past $5,000 for the first time.
Copper has also been in focus. It was reported nearly two weeks ago that Glencore and Rio Tinto had re-entered negotiations to form the world’s largest mining company. The reason? Capitalising on copper at a time when prices have hit a 10-year high.
And of course, let us not forget Venezuela—the recent capture (or arrest, depending on your persuasion) of its president (or former president, depending on your persuasion) Nicolás Maduro has seen shares in oilfield services companies rise in response. This is hot on the heels of Trump’s ‘drill baby drill’ agenda, which has taken a wrecking ball to environmentally-conscious investment and injected the fossil fuels industry with new life.
As we all know, market prices are not always good indicators of a stock’s long-term investment future—particularly in commodities, which have historically performed well during periods of high inflation but often struggle once economic conditions stabilise.
This, however, has not deterred investors from taking advantage of the current price spike.
In a recent interview with MandateWire, AOX’s sister publication, Carter Family Office partner Luke Carter said the single family office’s strategy for 2026 is focused on investing in energy security and commodities.
“We’re focusing mainly on the diesels within the physical space rather than any other type of distilled or refined products,” said Carter, who added that the family office is also eager to support transactions for physical gold trading operations, as well as oil and gas, given the rise in prices.
FutureWise, Fidelity International’s default investment strategy for UK-based pension schemes, takes a more conservative line. Investment director James Monk said the fund invests in commodities “tactically” rather than on a strategic basis. It made a small allocation to gold last year.
Monk noted that while a lot of commodities do not have a long-term growth expectation, inflation hedging by investing in assets such as gold becomes important for those moving into a bond-oriented portfolio as they approach retirement.
Yet others question whether the benefits of investing in commodities outweigh the risks.
Chris Arcari, head of capital markets and a senior investment research consultant at Hymans Robertson, has cautioned against investment in assets with returns driven entirely by price movements. In Arcari’s view, this has led to limited appetite for commodity exposure from the consultancy’s institutional clients.
“They are an entirely speculative asset with no income. Double edged sword – opportunity cost of holding but also makes them very difficult to value,” Arcari said. “We acknowledge the diversification benefit gold and industrial commodities can provide, but this needs to be carefully considered against the above opportunity cost.”
He added that while there is a theoretical case for certain commodities as an inflation hedge, the relationship has proved inconsistent over the long term.
Peter Sleep, director of Callanish Capital, concurred. He noted the cyclical nature of commodity prices and investing, adding that “long-term investing in commodities is a loss-making enterprise”.
But Sleep acknowledged that investment in commodities through commodity futures contracts – standardised agreements to buy or sell a specific amount of a commodity at a future date – is a way to safeguard against these risks and generate positive returns.
“For most long-term investors with well-diversified portfolios, an allocation of at least 5 per cent seems prudent,” Sleep said.
Research by Vanguard took a similar line, suggesting that long-only exposure to commodity futures can produce positive real returns. The case rests on two theories, Normal Backwardation and the Theory of Storage. I will spare you the detail and say that the long and short of it – pun intended – is as follows: there can be a positive risk premia associated with investing in commodities.
Arcari remains sceptical. He noted that when commodity markets were dominated by producers willing to pay that premium, investors benefited from persistently positive roll yields — returns generated by selling expiring futures contracts and reinvesting in new ones.
Yet as the commodity markets have become more dominated by institutional investors, Arcari argued, those yields have increasingly turned negative, making widespread investor enthusiasm “self-defeating”.
Such a debate highlights a familiar tension for investors. If you invest early, tactical exposure can deliver positive returns. Yet enthusiasm that builds after prices have already surged risks eroding the very returns that initially attracted capital.
The takeaways, therefore, are simple: commodities are a tactical tool, not a long-term destination. If investors do allocate to them, it’s with a well-diversified portfolio in their arsenal – and with full awareness that the sooner you join the party, the better.