By Tim Courtney, Chief Investment Officer
Equity and debt markets tend to get the most attention and usually make up the bulk of investment portfolios. But there are other markets—like commodities, derivatives, and real estate—that can also help us understand how the economy is behaving and what investors are thinking. And in 2025, commodities have provided us with some additional insights.
When we refer to commodities—whether agricultural products, metals, or energy—we’re talking about “use assets.” These are the raw materials we consume or convert into finished goods. Unlike financial assets, commodities don’t generate income. Over time, the expected return from a broad basket of commodities is very close to the rate of inflation. Over time, inflation is the rising price of the things we buy—many of those things being comprised of commodities.1
By themselves, commodities are not a good way to grow purchasing power over time since you need returns higher than inflation to do that. Still, commodities can play a role in portfolios as a diversifier that can help hedge inflation risk. When inflation spiked 20% from 2021– 2024, gold was up 36% and broad commodities were up 46%.2 In 2025 through nearly the end of April, while stocks markets were negative, gold was up 25%, oil and gas MLPs were up 5%, and commodities were break even.3 In 2022, and again in 2025, these assets provided diversification and a source of liquidity when equity markets were struggling.
What could the market be telling us with these price moves? It could be saying that we are not done with higher inflation. While inflation is well below its peak levels in 2022 and 2023, it’s been stubborn, hovering around 3% and still above the 2% target.4 That’s elevated enough to concern investors. The bond market is also suggesting that investors are looking for inflation hedges as prices for Treasury Inflation-Protected Securities (TIPS) have risen. TIPS are the best performing bond asset class YTD.5
Taxes and inflation are the two biggest frictions we face as investors as these forces continuously erode our returns.6 Even though they are not perfectly correlated with inflation over short periods of time, TIPS and real assets—like real estate, commodities, precious metals, infrastructure, and MLPs—can help hedge inflation risk over time.
Stocks also provide some protection against inflation. Companies can and do raise prices in response to inflation, which boosts cash flow. But inflation causes their own costs to increase and their investors to discount the prices they pay for stocks, so inflation provides both a tailwind and a headwind to stock returns.
Inflation remains a risk today. We should review our long-term cash flow and planning assumptions and include a realistic level of inflation. Diversification also helps manage this risk. If you have any questions about your portfolio and planning assumptions, please contact your Exencial advisor.
Sources
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