Can the commodities ‘supercycle’ protect your portfolio?

In times of rising inflation and interest rates, commodities can provide essential protection for investors’ portfolios.

“If you’re listening to the bond market today, it’s telling you ‘diversify,’” Evy Hambro, global head of thematic and sector investing at asset manager BlackRock, tells MoneyWeek Talks, which is available on all podcast platforms and YouTube.

Bond yields have soared over recent weeks, a classic sign that all is not well. Government deficits are rising higher and higher, but spending shows no signs of abating.

Interest rates are rising, and yet the stock market is trading at unprecedented heights.

“There’s an alarm going off, and people aren’t listening”

“It’s very clear to me that government bonds are telling you things aren’t healthy,” he said. “The annual deficits that governments are having to fund are growing, and that’s putting a lot of pressure on the financial system.”

Higher bond yields are the natural response to this pressure, as investors seek higher rewards for the higher risk perceived in lending to governments.

Governments are much less likely to default on their debts than businesses or other private borrowers. But what they often do instead, is reduce the real value of their debt through inflationary policies.

“How do you have some protection against that?” asks Hambro. “To me, it’s real assets. Real assets can be infrastructure, it can be commodities, it can be gold. Those are the kind of things that through time have protected purchasing power.”

Are commodities set to thrive?

Hambro believes that the current market setup sees us on the verge of a new commodity ‘supercycle’ – following previous iterations that have seen prices of the assets initially rise as demand ran away from supply, then fall after the investments to capture this opportunity meant supply caught up.

Infrastructure in the developing world is in increasing need of replacement, which strengthens demand for industrial metals. This dynamic is being further fuelled by the rise of artificial intelligence (AI).

“We’ve now gone into this period of very, very strong demand growth, driven by this incredible scale of investment around technology, AI, electrification and so on,” says Hambro. This has, he says, “exposed the fragility and the maturity of existing infrastructure in the developed world”.

Copper is one of the commodities most impacted by this trend, given its central role in electrification; the price of copper has risen nearly 17% so far this year.

Competition for these resources is intense, given their strategic importance. Nations are now viewing access to them as a national security concern.

“There’s a bit of a war going on for access to commodities as a result,” says Hambro.

China’s effective monopolisation of rare earth minerals – critical components in most modern technologies – is a case in point.

“There was a story from last year when president Trump went to China to discuss tariffs, and had to come back saying he’ll be unable to put tariffs on China because they’re going to turn off the rare earth supply,” says Hambro. “All the automotive companies in the US said, ‘whatever you do, don’t lose that supply, because there’s no production without it.’”

How much gold to hold, and why

As well as other real assets, in Hambro’s view, portfolios should contain an allocation of approximately 10% to gold.

He compares this allocation to insurance. Every year gold underperforms, you’ll top it up by selling off some of your other assets that have outperformed.

This feels like a waste of money in the same way that buying insurance you don’t use can.

“But if you don’t have insurance, when something goes wrong it’s very painful,” says Hambro.

Gold has a track record of holding its purchasing power: it’s often said that an ounce of gold has bought a men’s suit for 2,000 years.

So during periods when inflation is high and other assets are falling, gold can act as an insurance policy for your portfolio.

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