A commodity is a raw material — gold, oil, copper, wheat, natural gas. Things that get dug up, pumped, or grown.
They are talked about constantly, particularly when inflation is in the news, and the pitch is usually the same: real assets, tangible value, protection when paper money loses ground.
Before evaluating that, one structural fact needs establishing, because it changes everything.
They Produce Nothing
A company generates earnings. It can pay dividends, reinvest in growth, or buy back shares. Own a share and you own a claim on a stream of future cash.
A bond pays interest on a schedule. Own it and you receive income.
An ounce of gold sits there. In a year it is the same ounce. It has paid you nothing, and if anything it has cost you something to store and insure.
This is not a criticism. It is the defining characteristic, and it means the entire return depends on selling it to someone later for more than you paid.
Which places commodities in a different category from the assets we covered in investing versus speculating. Graham’s test asks for thorough analysis, safety of principal, and an adequate return. With no cash flow to analyze, there is nothing to value — only a price to have an opinion about.
That does not make commodities useless. It does mean the case for holding them has to rest on something other than expected return.
Graham’s Evidence on Gold
Benjamin Graham examined the standard argument directly: people who mistrust their currency buy gold.
He looked at the record from the 1930s to the early 1970s. Over roughly 35 years, gold moved from around $35 an ounce to about $48 — a rise of some 35 percent.
Inflation over that period was considerably higher. And throughout, the holder received no income while incurring storage costs.
His conclusion was blunt: money left in a savings bank earning interest would have done better, despite the rise in the general price level. The near-complete failure of gold to protect purchasing power in that period, he argued, casts serious doubt on protecting yourself from inflation by putting money into things.
The Serious Counterargument
Graham wrote that in 1972, and the years afterward were not kind to his conclusion.
The investment historian Peter Bernstein argued Graham was flatly wrong about precious metals, pointing to gold’s subsequent record of outpacing inflation over certain periods.
The financial adviser William Bernstein makes a more practical version of the case. A small allocation — he suggests around 2 percent of total assets — is too small to damage your returns when gold performs badly. But when gold performs well, the returns are sometimes so large that even a tiny position contributes meaningfully.
This is a genuinely different argument from “gold goes up.” It is an argument about portfolio construction: hold a small amount of something that behaves unlike everything else, and accept that most of the time it will do nothing useful.
How Professionals Actually Do It
Worth knowing what large asset allocators do, because it looks nothing like the pitch.
Sébastien Page of T. Rowe Price describes a “real assets” allocation in their model portfolios — but it is composed of global stocks expected to perform well in inflationary periods. Metals and mining companies, precious metals companies, real estate investment trusts, energy companies.
Not the commodities themselves. The businesses that produce them.
The distinction matters. Those companies generate earnings and can pay dividends. You get some inflation-linked exposure while still owning something with cash flow.
Note also the size. In one sample income portfolio, real assets account for around 2 percent of the total.
Page also explains the reasoning: inflation has been low for extended periods, and there is a genuine internal debate about whether to hold inflation protection at all. Their conclusion is that inflation remains a tail risk — unlikely in most years, damaging when it arrives — which justifies a strategic allocation even when it looks unnecessary.
That is the honest case for commodities exposure. Not that it will make you money. That it may help in a scenario that would otherwise hurt.
The Other Inflation Option
One alternative deserves mention, because it addresses the same concern more directly.
Treasury Inflation-Protected Securities are US government bonds whose principal adjusts with the consumer price index. If inflation rises, so does what you are owed.
They appear in most professional inflation-protection allocations, often alongside or instead of commodity exposure.
Compared with gold, TIPS pay interest, are explicitly linked to measured inflation rather than hoped to correlate with it, and require no storage.
They will not deliver a spectacular year. That is rather the point.
What Graham Said About Collectibles
The same reasoning extends to a category people often group with commodities.
Graham acknowledged that diamonds, paintings by acknowledged masters, first editions, rare stamps and coins have all shown striking gains in market value over time.
But he observed something artificial, precarious, and occasionally unreal about the prices quoted for them. He found it difficult to think of paying an enormous sum for a rare silver dollar as an investment operation.
His verdict was that he was out of his depth there — and that very few of his readers would find the swimming safe and easy.
Ninety years on, applied to whatever the current version happens to be, that seems about right.
If You Decide to Hold Some
Four things worth getting right.
Keep it small. The professional allocations are in low single digits. A position large enough to matter when it rises is also large enough to hurt when it falls — and it falls for extended stretches.
Prefer funds to physical holdings. A broad commodity ETF or a fund holding resource companies avoids storage, insurance, authentication, and the wide spreads that come with buying and selling physical metal.
Check the expense ratio. Commodity funds are often considerably more expensive than broad stock index funds, and the same arithmetic applies — costs compound against you, as covered in index funds explained.
Know why you hold it. If the answer is “in case of an inflation shock,” fine — and expect it to look like dead weight most of the time. If the answer is “because it has been going up,” that is a different activity with a different name.
What Comes First
This is a question for late in the sequence, not early.
Before considering a 2 percent allocation to anything, the emergency fund should be complete, high-interest debt cleared, and the employer match captured. Those are certain returns. Commodity exposure is a hedge against a scenario that may not arrive.
The order is in which retirement accounts to fill first.
It is also worth noticing when interest in commodities tends to spike — after inflation has already been in the headlines for months. Buying protection after the event it protects against has begun is a familiar pattern, and the reasons are in Mr. Market.
The Bottom Line
Commodities produce no income. Every dollar of return has to come from selling to someone else at a higher price.
Graham’s evidence on gold as an inflation hedge was unflattering. His critics have a real point about later periods, and the strongest version of their case is about portfolio construction rather than returns.
Professional allocations that do include commodity exposure keep it small, often access it through resource companies rather than the raw materials, and pair it with inflation-linked bonds.
For most people, a broad stock index fund plus some inflation protection covers the same ground with less complexity — and the businesses inside it actually earn something.
If you want exposure anyway, keep it small, use funds, watch the costs, and be clear that you are buying insurance rather than growth.
This article is general information, not personalized investment advice. All investing involves risk, including possible loss of principal.
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