Do Commodities Still Work as Portfolio Diversifiers?
As investors increasingly treat commodities as financial assets, their value as portfolio diversifiers has diminished.
Commodities are often touted for their diversification benefits. Because their prices mainly depend on the balance of supply and demand, they often show very low correlations with other asset classes.
Commodities are traditionally defined as raw materials or other basic ingredients used in manufacturing and industrial processes. As basic materials, they're essentially interchangeable with other commodities of the same type. In addition to their diversification benefits, commodities can also be a useful hedge against inflation. Commodities themselves are a major part of most inflation indexes, and it makes sense that their prices tend to rise when inflation is increasing. Some commodities also show seasonal price movements, which can affect returns over shorter periods.