This paper provides an overview of commodities as an asset class. It briefly explains the nature of investing in commodities futures. It then discusses the performance of commodities, partly through the lens of scenario analysis, with an emphasis on inflationary scenarios.
We find that commodities may act as valuable portfolio diversifiers but typically only in very specific environments. These environments tend to be when most major asset classes struggle (e.g., during stagflation). Yet, to benefit from this hedge, investors will have to be willing to accept the opportunity cost that commodities’ low historical (and expected) returns present, as well as be willing to ride out long periods of underperformance.