Commodity Talk| Equities, bonds... and commodities? Why investors may need a third pillar for diversification, Navneet Damani decodes

For decades, the traditional investment portfolio has revolved around two major pillars—equities for growth and bonds for stability. But in a world increasingly shaped by geopolitical tensions, supply disruptions, inflation risks, energy security concerns and rapid technological transformation, is it time for investors to consider a third pillar: commodities?

Once seen largely as a cyclical trading opportunity or an inflation hedge, commodities are increasingly finding a place in long-term portfolio allocation. From gold's role as a hedge against currency and geopolitical risks to copper's structural demand story driven by electrification, AI and data centres, the investment case is evolving.

But how much exposure is enough? Can too much gold become a concentration risk? And should investors buy individual commodities or take a diversified basket approach?


In this edition of Commodity Talk, we speak to Navneet Damani, Head of Commodity Research at Motilal Oswal Financial Services, to understand why commodities may be moving from the trading terminal to the core portfolio. Edited Excerpts –

Q) For years, commodities were considered cyclical trading instruments rather than long-term investment assets. Is that changing now?

A) Investors are increasingly looking beyond commodities as just an inflation hedge or a short-term cyclical trade. Rising volatility and trading volumes are driving greater participation, while structural forces such as geopolitics, energy security and sustained central-bank gold buying are creating longer-term investment opportunities.

Growing retail participation and improving market liquidity has turned commodities increasingly accessible as a portfolio component.

Bullions are leading this shift, but the case for selective exposure to crude oil, natural gas and industrial metals is also strengthening.

Commodities do offer diversification benefits, they are increasingly evolving from a tactical trade into a strategic, portfolio allocation.

Q) With equity markets going through its own challenges can commodities improve diversification when inflation and geopolitical risks rise. Should Indian investors now think of commodities as an asset-allocation tool rather than just a trading opportunity?

A) Investors should start viewing commodities as an asset-allocation tool rather than purely as a trading opportunity. The traditional role of commodities as an inflation hedge is no longer the whole story.

Gold and silver are increasingly being valued for their diversification benefits, while crude, natural gas and industrial metals are seeing larger price swings as geopolitics, supply disruptions and structural changes reshape global markets.

At the same time, deeper liquidity and wider participation in India’s commodity markets are making the asset class more accessible.

Commodities should complement, rather than replace, equities and bonds, with gold offering the strongest case for strategic allocation.

Tactical opportunities around geopolitical events, inventories and macro developments will remain, but the broader shift is clear: commodities are becoming a strategic portfolio allocation, not just a trading instrument.

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Q) How much commodity exposure is too much? Should a retail investor own individual commodities or take a broader basket approach?

A) There is no fixed commodity allocation suitable for every investor, as exposure should depend on risk appetite, investment horizon and the portfolio mix.

However, as a guideline, commodities can constitute around 10–15% of a diversified portfolio. Investors with higher risk tolerance, adequate market knowledge and the ability to manage derivatives may consider individual commodities through exchanges.

For long-term investors, diversified commodity baskets or regulated exchange-traded products may be more appropriate. A basket reduces dependence on any single commodity, while individual exposure suits investors with stronger conviction.

Ultimately, allocation and product choice should align with the investor’s objective and risk profile.

Q) Copper has hit record highs. Is this a cyclical rally—or the beginning of a structural repricing of the metal?

A) LME copper prices have inched higher 16% YTD, backed by weaker dollar, structural demand and depleting inventories outside the US. There is a cyclical element, but the bigger story is structural: demand is rising from electrification, renewable energy, EVs, power grids and now Al, while new copper supply is becoming harder and more expensive to bring online. That combination could support a much higher long-term price for copper.

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Q) We have spent years talking about EVs driving copper demand. Is AI and the data-centre boom now becoming an even bigger demand driver?

A) Yes, Al and data centres are becoming a much bigger copper demand driver. EVs remain important, but Al requires huge amounts of electricity, which means more power generation, transmission lines, transformers, cables and data-centre infrastructure—all of which use copper.

So Al is not replacing the EV story; it is adding another powerful source of demand and strengthening the overall copper outlook.

S&P Global expects energy-transition applications overall to provide the largest source of incremental copper demand through 2040, adding around 7.1 million tonnes of annual demand between 2025 and 2040.

Q) Gold has become the default hedge for Indian investors. But can too much gold actually become a concentration risk? Has gold become more than an inflation hedge?

A) Gold remains a preferred hedge because it generally attracts investment when riskier assets underperform or markets face geopolitical uncertainty.

However, excessive allocation can create concentration risk, as gold does not generate income and may correct when interest rates and real yields remain elevated.

Gold has also evolved beyond being merely an inflation hedge. It can provide protection against currency depreciation, rising sovereign debt, geopolitical tensions, financial-system stress and portfolio volatility.

Its relatively low correlation with traditional assets strengthens diversification. Therefore, gold should be treated as a strategic component of a balanced portfolio, rather than a substitute for the portfolio itself.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)