Commodities have been integral to human economic activity for millennia, yet they remain an underutilised element in most private investor portfolios. The inflation surge of 2021-2023 reminded investors of their inflation-hedging properties; the energy transition is reshaping structural demand for metals like copper, lithium, and cobalt; and the reopening of global supply chains following COVID disruptions highlighted just how exposed the global economy is to commodity price volatility.
For internationally mobile HNW investors building multi-asset portfolios, understanding how to access commodities, why they might belong in a portfolio, and the practical considerations of commodity exposure is increasingly important.
What Are Commodities?
Commodities are standardised raw materials or primary goods that are interchangeable with other goods of the same type. The major commodity categories are:
Energy: Crude oil (WTI and Brent), natural gas, gasoline, heating oil, and increasingly, battery metals (lithium, cobalt, nickel) relevant to the energy transition.
Precious metals: Gold, silver, platinum, palladium. Gold is the most widely held commodity by private investors.
Industrial/base metals: Copper, aluminium, zinc, lead, tin, nickel. These metals are fundamental inputs to construction, manufacturing, and energy infrastructure.
Agricultural commodities (soft commodities): Wheat, corn, soybeans, coffee, cocoa, cotton, sugar. Prices are influenced by weather, geopolitics, and global demand patterns.
Livestock: Cattle, hogs — less common in private investment portfolios.
The commodity "spot price" reflects the current market price for immediate delivery. Futures prices reflect the expected price at a future date, which can be above the spot price ("contango" — common in crude oil markets when storage is cheap) or below the spot price ("backwardation" — occurs when immediate delivery is in high demand).
Why Include Commodities in a Portfolio?
Inflation hedging: The historical evidence supports a positive correlation between commodity prices and inflation. When the general price level rises — particularly due to supply shocks — commodity prices typically rise first, as commodities are upstream inputs to production. The Bloomberg Commodity Index rose approximately 27% in 2021 and delivered further gains in 2022 as inflation accelerated.
Diversification: Commodity returns have historically shown low or negative correlation to equity and bond returns over full market cycles, providing genuine portfolio diversification. This is particularly relevant during "stagflationary" environments (rising inflation, slowing growth) when equities and bonds can both decline simultaneously.
Demand from emerging markets: As the global middle class expands, demand for food, energy, and metals grows — providing structural demand support over the long run.
Currency diversification: Commodities are priced in US dollars globally. For non-US investors (including UK investors), commodity exposure provides indirect USD exposure, which can be a positive diversifier against a weakening pound.
How to Invest in Commodities
Exchange Traded Commodities (ETCs): The most practical route for private investors. ETCs trade on stock exchanges like shares and provide exposure to a single commodity or a commodity index:
- Physically backed ETCs: Hold the actual commodity (most commonly used for gold, silver, platinum). The iShares Physical Gold ETC (NYSE: IAU) and WisdomTree Physical Gold (LSE: PHAU) hold actual gold bars in vaults. You own a share of the gold holding.
- Futures-based ETCs: Track commodity futures contracts. Used for oil, agricultural commodities, and base metals where physical delivery is impractical. Suffer from "roll cost" when futures contracts are rolled from expiring months — this can create a drag on returns vs the spot price.
- Commodity index ETCs: Provide diversified exposure to a basket of commodities (Bloomberg Commodity Index, S&P GSCI). Broad diversification across energy, metals, and agricultural sectors.
Mining and energy company equities: Buying shares in mining companies (Rio Tinto, BHP, Glencore, Anglo American for diversified miners; Antofagasta for copper; Fresnillo for silver and gold) or energy companies (Shell, BP, ExxonMobil) provides indirect exposure to commodity prices through the company's earnings and dividends. This adds company-specific and equity market risk on top of the commodity price exposure — but also provides dividends and doesn't suffer from futures roll costs.
Direct ownership (gold): Physical gold in the form of coins or bullion bars can be purchased and held directly. Vault storage (Royal Mint Bullion, BullionVault, GoldMoney) avoids the risks of home storage. Physical gold held by UK individuals is a "wasting chattel" if it has a useful life of less than 50 years — gold coins are NOT wasting chattels (they have infinite life), so gains on gold bullion and coins are subject to UK CGT. Gold ETCs held in an ISA or SIPP shelter the gains from UK tax.
Commodity futures directly: Professional investors trade commodity futures contracts on exchanges (CME, ICE). This requires significant capital, commodity market expertise, and access to a commodities broker. Not appropriate for most private investors.
Commodity hedge funds: Some hedge funds specialise in commodity trading strategies — long/short, relative value, or trend-following. Access is typically through fund of funds or specialist platforms; minimum investments typically £250,000+.
The Major Commodity Sectors in 2026
Energy: The oil market has been shaped by OPEC+ production management, Russian supply disruptions following the 2022 Ukraine invasion, and the gradual growth of EV adoption reducing long-term oil demand forecasts. Natural gas remains structurally important for European energy security. Uranium (relevant for nuclear power's role in the energy transition) has been one of the stronger-performing energy commodities in recent years.
Gold: Reached all-time highs above $2,500/oz in late 2024, supported by central bank buying (particularly from emerging markets seeking to diversify away from US dollar reserves), geopolitical uncertainty, and persistent inflation concerns. Gold's long-term return in real terms is approximately zero — it is a store of value and an insurance asset rather than a return-generating investment.
Copper: The "doctor of the economy" — copper's wide use in construction, electronics, and (critically) energy infrastructure (solar panels, wind turbines, EVs, grid cables) means its demand profile is strongly tied to both economic growth and the pace of the energy transition. Supply growth has been limited; structural deficit forecasts for copper are common among commodity analysts.
Agricultural commodities: Food security has become a geopolitical concern following the Ukraine war (Ukraine and Russia together supply approximately 30% of global wheat exports). Agricultural commodity prices are highly seasonal and weather-dependent, adding volatility to any allocation.
Position Sizing in a Portfolio
Most investment professionals recommend a 5-15% allocation to commodities in a broadly diversified portfolio, with the specific allocation dependent on:
- Inflation sensitivity (higher allocation if your liabilities are inflation-linked)
- Portfolio objectives (defensive vs growth)
- Tolerance for volatility (commodities are more volatile than bonds, though less so than equities over some periods)
Within the commodity allocation:
- Precious metals (particularly gold): 5-10% of total portfolio as a "crisis hedge"
- Broad commodity index exposure: remainder of the commodity allocation
For UK investors, holding commodity ETCs within an ISA or SIPP eliminates the UK CGT on gains within the wrapper.
Tax Treatment of Commodity Investments in the UK
Commodity ETCs (shares): Treated as shares for UK CGT purposes. Gains are subject to CGT at 18%/24%. If held within an ISA or SIPP, gains are sheltered.
Physical gold (coins and bars): Not a wasting chattel (indefinite life); subject to CGT at 18%/24%. The £6,000 chattel exemption does NOT apply to gold above £6,000.
Gold and silver bullion as "investment gold": VAT-exempt (investment gold coins and bars are exempt from VAT under UK law, unlike silver and platinum which attract 20% VAT).
Commodity futures (UK retail investor): Gains are subject to CGT if structured as contracts for difference or options; as spread bets they are exempt from CGT in the UK (no CLOG rules apply).
Compliance Caveats
Commodity prices are volatile and can fall significantly. Past performance of commodity indices is not indicative of future returns. The tax treatment of commodity investments depends on how they are held and the investor's personal circumstances; advice from a qualified tax adviser is recommended for significant positions. This article is for general information only and does not constitute investment advice.
How Global Investments Can Help
Global Investments advises internationally mobile HNW clients on portfolio construction and asset allocation, including the role of commodity exposure within a diversified international portfolio. If you are reviewing your asset allocation and want to assess whether commodities have a role in your portfolio, contact us to discuss your investment objectives and risk tolerance.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.