Welcome to this week's edition of Cape May Wealth Weekly. If you're new here, subscribe to ensure you receive my next piece in your inbox. If you want to read more of my posts, check out my archive! This is the fourth piece in our ongoing asset class primer series. You can read the previous issues on gold, hedge funds, and bonds.

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If you’d asked us in January what would drive commodity markets this year, we would have probably guessed central bank gold purchases, or maybe copper’s role in the AI buildout. What we would not have guessed was that a war between the US, Israel, and Iran would turn commodities into one of the best performing asset classes of 2026.

Commodities are difficult to forecast. Their contribution to a portfolio often comes from situations that are hard to predict upfront (like the recent conflict in the Middle East). We wrote about gold specifically back in February. Today, let’s zoom out to the broader complex - oil and gas, industrial metals, agriculture - how they behave, if and what role they can play in a multi-asset portfolio, and how affluent investors can access them.

Commodities are raw or primary materials that are, in principle, interchangeable regardless of producer. A barrel of West Texas Intermediate crude from one producer is functionally identical to a barrel from another. This interchangeability (what economists call fungibility) is what makes them tradeable on global exchanges, and this - combined with its physical nature and the logistics of it - is what makes them sensitive to global supply-and-demand dynamics instead of company-specific fundamentals.

The commodity universe breaks broadly into four categories. First, energy: crude oil, natural gas, coal, and their derivatives - the commodities most exposed to the kind of geopolitical disruption we’re seeing in the Strait of Hormuz today. Second, precious metals: primarily gold and silver, which we covered in detail in the gold primer, and which behave somewhat differently from the rest of the commodity complex given their dual role as monetary assets. Third, industrial metals: copper, aluminium, nickel, zinc - materials that are direct inputs into manufacturing, construction, and increasingly, the energy transition. Fourth, agricultural commodities: everything from wheat and corn to coffee and livestock, which are driven primarily by weather, supply chain dynamics, and global food demand.

Each of these sub-categories has different return drivers, which matters a great deal when you’re thinking about how to use them in a portfolio. An allocation to commodities that is 80% energy behaves very differently from one that is 80% agricultural goods.

At Cape May, when we think about building resilient portfolios, we look at a question that might sound simple. What could cause most of your portfolio to lose value at the same time? The answer is almost always some combination of either falling economic growth (bad for equities, eventually bad for credit) or rising inflation (bad for nominal bonds, bad for stocks if inflation results in higher interest rates).

The traditional 60/40 portfolio (equities and bonds) has a well-documented weakness in the latter scenario. We saw it in 2022 in stark terms. Equities fell roughly 20%, while nominal bonds, rather than providing the usual cushion, fell alongside them. The culprit was inflation.  But the assets that held their ground? Energy commodities, gold, and short-duration inflation-linked bonds.

So the building blocks we look to for an environment of higher or rising inflation fall into two categories: inflation-linked bonds, which adjust their principal to offset inflation-driven losses in real value, and commodities, which don’t just benefit from inflation, but have historically often been the cause of the high-inflation episodes of the past century. Energy shocks push up the price of nearly everything that depends on energy to produce or transport, which is, well, most things related to our economy. This doesn’t mean that commodities will outperform equities over the long run - they typically won’t - but that they provide diversification in the specific market environment that a traditional portfolio handles worst.

The Iran war and the resulting disruption to the Strait of Hormuz - a passage through which roughly a fifth of the world's oil trade moves, and one the IEA has called the largest single oil supply disruption in market history - is a commodity-driven inflation shock. US headline CPI inflation was at 3.4% year‑over‑year in August, unchanged from July but still well above the Fed’s 2% target. The ECB, rather than cutting rates as many had expected at the start of the year, raised its deposit rate first to 2.25% in June and then to 2.50% at its meeting last week, citing energy‑driven price pressure after euro‑area inflation jumped to 3.3% in August, with energy inflation at 14.3%.

Unlike equities, whose long-run return is typically anchored to corporate earnings growth, or bonds, whose return is contractually defined at purchase, commodities don’t have a ‘clean’ return driver. Their returns come from a mix of physical supply and demand, storage and financing costs, and - this year being a good example - geopolitical shocks that can move prices by double digits within weeks.

That makes historical return figures for the asset class as a whole somewhat less useful than they are for stocks or bonds. The composition of what's driving the number changes constantly. Still, some reference points. The Bloomberg Commodity Index is up roughly +32.5% year-to-date (as of 14.09.26), and around +40.0% over the trailing twelve months - one of the strongest runs the index has produced in years. Nearly all of that came from the energy sector on the back of Brent crude spiking to $126 a barrel in the spring and now trading around $105, still up +70.6% year-to-date (as of 14.09.26). Copper has had its own rally, hitting all‑time highs at $6.89 a pound in early September (YTD: ∼12.4%) on a mix of US tariff‑driven stockpiling, supply disruptions in Chile and the Democratic Republic of the Congo, and structural demand from data centers and grid buildouts.

However, precious metals and agriculture did not participate in this rally. Gold and silver both hit records in January before correcting sharply through the spring, as the same war that drove up oil also pushed up real yields and delayed the rate cuts that would normally support gold. Cocoa has fallen by roughly -60% from its late-2024 peak as West African harvests recovered. Coffee remains historically elevated but is off its 2025 highs on a record Brazilian crop. In other words, the index return conceals a wide spread of individual outcomes ranging from ups to downs.

To take the very long view, historically the prices of industrial commodities (i.e. excluding precious metals) move up and down over cycles but effectively move sideways. That means if you buy a single commodity - just based on the historical view - you are not expected to make any money. As we said initially: there are no dividends or interest payments to be expected, but rather storage costs that are a drag on performance. Scarcity anchors the value and so far the more efficient use of commodities due to technological advances have balanced the increased need for commodities due to the continuous global economic growth. 

However, when you look at a mixed commodities basket, like the equal-weighted approach by Bhardwaj, Janardanan and Rouwenhorst (2019, “BJR”), the return profile suddenly becomes very appealing - that is, +4.4% p.a. over US treasury bills for the time period 1871-2022 as shown by Dimson, Marsh, Staunton and Credit Suisse (2023) following BJR’s methodology. This compares to +5.1% for US stocks over the same time period. The reason being that commodity prices move in multi-year cycles - and the cycles differ across the various commodities. An equal-weighted basket captures this “momentum trade” by realising gains in commodities whose prices rise and rebalancing into other commodities whose price has fallen (and likely recover at a later point in time). 

A further reason commodities earn their allocation is their low and often negative correlation with equities and nominal bonds during the exact scenarios - inflationary shocks, geopolitical supply disruptions - where those correlations matter most. This is what Markus refers to when we talk about an “all-weather” approach to portfolio construction, combining asset classes that behave differently across economic regimes, not just asset classes with high standalone returns. Still, it is worth noting that in “normal” times, commodities can be very much correlated with equities as economic growth supports stock earnings as well as the demand for commodities.

One further caveat here: the relationship between commodities and inflation is not as stable as some might assume. According to Bridgewater Associates, in about 50% of inflationary periods over the past century, inflation was caused by a spike in commodity prices - in the other half, commodities would not have given you meaningful inflation protection. In an environment of demand-driven inflation (i.e. growth is strong, and prices are rising because people are buying things), commodities tend to do well. In an environment of cost-push inflation driven by supply shocks - which, coincidentally, describes much of what we are seeing with energy markets in 2026 - the relationship can be more nuanced. The geopolitical premium on oil from Middle East tensions, for example, doesn’t automatically translate into a broad commodity rally if global growth is slowing simultaneously.

This is where 2026 has been unusually instructive. Morgan Stanley’s research of the first‑quarter Iran shock found that, during the worst weeks of the conflict, a standard 60/40 portfolio posted a loss, while adding a small allocation to a diversified commodity basket materially reduced the drawdown. Commodities performed strongly and moved in the opposite direction to stocks and bonds.

To be fair, commodities don’t go up every year. In most years, they lag equities, and anyone who bought a broad commodity index in, say, 2015 spent half a decade waiting for returns. But in the specific scenarios where stocks and bonds fall together (like a supply-shock-driven inflation spike, the kind of geopolitical event we discussed in Fall of the Empire?), commodities have tended to be one of the few things in a portfolio that moves the other way.

There’s a nuance worth adding here. Recent academic research looking at nearly seventy years of US data found that energy commodities specifically - crude oil and gasoline in particular - and to a lesser degree industrial metals like copper, have been the most reliable inflation hedges historically, with hedge ratios higher than gold. Gold’s inflation-hedging properties, according to the same research, actually weakened over 2020-2025 and in some periods turned negative. So if inflation protection specifically is your objective, the broader commodity complex - and energy within it - may be doing more of that work than just a gold allocation would.

Coming back to the Aspirational Investor Framework we regularly reference with clients, we’d place a diversified, strategic allocation to commodities (including gold) in the Market Bucket, alongside equities and bonds, as a structural diversifier. That’s distinct from a concentrated position in a single commodity you have a strong thesis on - for example, copper on the back of the AI buildout, or oil on a view about the Middle East, which we’d see more as a trade fit for the Aspirational Bucket. (If you’re looking for support in identifying the right way to add commodities to your diversified portfolio, shoot us a message.)

There are several risks that investors in commodities should understand, because they are different in character from the risks of equities or bonds.

The most obvious is price volatility, which even for a diversified commodities basket tends to be higher than the volatility of the stock market. But connected to this is what’s known as contango risk: you can only really access commodity markets via derivatives, i.e. “futures” in particular, and contango occurs when futures contracts are priced above the current spot price, meaning investors rolling their contracts forward have to buy the next contract at a higher price than they sold the expiring one. In energy markets especially, this can create a persistent drag that separates the return of a commodity futures ETF from the intuitive “I own oil” mental model most investors carry. The reason for this systematic return drag is that many investors that buy the futures want exposure to the commodity prices, but certainly don’t wish the physical delivery of e.g. a barrel of oil, which a future contract ultimately leads to. Hence, investors need to sell their futures to the economic actors that actually require the commodity for their production processes. This creates systematic price pressure close to the expiry date of the futures contract. To mitigate this risk, investors (and several ETFs these days, too) should consider rolling their futures into longer maturities well before the delivery date. Some other strategies do explicitly try to exploit this market dynamic and sell short-term futures to buy longer-dated ones (which worked well up until February 2026).

Beyond that, there are concentration risks. The major commodity indices (like the S&P GSCI) are heavily weighted toward energy, with crude oil alone sometimes accounting for more than half the index. That’s a different exposure from a multi-commodity allocation, and investors who buy a commodity index without understanding this are often surprised when their “commodity allocation” moves almost entirely with the oil price.

Political and regulatory risks, particularly for investors in agricultural commodities or those with exposure to emerging markets producers. Export bans on agricultural goods (as seen from multiple countries in recent years), nationalization of mining assets, and sanctions on energy producers are all examples of risks. Furthermore, ethical considerations can play a role, especially when “speculating” with food prices.

Lastly, and particularly relevant for German investors, there are tax considerations. The “Abgeltungsteuer” treatment of commodity futures and ETCs can differ from that of equity ETFs, and investors should make sure their structure is efficient before implementing. (If you’re interested how we think about tax-aware investing in commodities and other asset classes, feel free to reach out.)

In practice, there are four main approaches.

The most accessible is through commodity ETCs (Exchange-Traded Commodities) or ETFs. These are liquid, low-cost, and widely available. A gold ETC, for example, is how most private investors efficiently access gold exposure without needing physical storage. Broad commodity index ETFs give exposure to a basket, though as mentioned above, the index composition and how it manages contango risk matter a great deal.

The second approach is through commodity-linked equities. Such as mining companies, energy producers, agricultural companies. These have the advantage of providing cash flow (dividends, earnings growth), which the physical commodity does not. The disadvantage is that you’re also taking on company-specific risk and operational leverage, management quality, and equity market correlation that dilutes the diversification benefit you’re seeking. Generally, we prefer direct commodity exposure for portfolio construction purposes.

Third, investors can access commodity exposure through active funds. Such as commodity-focused hedge funds, natural resource funds, or broadly diversified real assets funds. These can add value in specific situations, particularly when the manager has great expertise in a complex sub-market. But as with all active management, the key question is whether the alpha justifies the cost and illiquidity. In most cases we’ve seen, a low cost passive index does just as well or better over long periods.

Lastly, some investors hold physical commodities directly. Most commonly, by directly purchasing gold (as bars or coins) or other precious metals. For the Safety bucket, there’s an argument for physical holdings that can be accessed independently of the financial system. Beyond gold, direct physical holdings become impractical relatively quickly.

Haven't thought about whether commodities have a place in your portfolio, or how much (if any) makes sense for you? We work with affluent entrepreneurs and family offices on these questions, from sizing a commodities allocation to fitting it into the broader picture alongside equities, bonds, and the rest of the portfolio. We'd be happy to help, don't hesitate to reach out.

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