Good morning and Happy Sunday,

The world has changed meaningfully over the last few weeks, and those geopolitical shifts have had, and will continue to have, important consequences for portfolios. We may be moving from a regime defined by resilient employment and easing inflation concerns to one characterized by greater labour uncertainty and renewed inflation pressure.

That backdrop makes commodities particularly interesting.

Commodities are a unique asset class in portfolio construction, in large part because of the inelasticity often embedded in both their supply and demand. That matters because when markets are inelastic, even modest disruptions can lead to outsized price moves.

Supply Elasticity

Elasticity is a foundational concept in economics. It describes how responsive supply and demand are to changes in price.

In most markets, the supply curve slopes upward: as prices rise, producers are incentivized to bring more supply to market. As prices fall, supply tends to decline. But in some markets, supply cannot respond quickly to price. In those cases, supply is relatively inelastic.

The best examples are goods that take time to produce. If corn prices rise sharply, farmers cannot immediately grow more corn. If oil prices surge, producers cannot instantly drill new wells and bring that production online. In the short run, supply is constrained by time, capital, and physical capacity.

Demand Elasticity

On the demand side, consumers typically buy less as prices rise, which is why the demand curve slopes downward.

But not all demand is equally sensitive to price. Some goods are highly elastic: consumers can reduce consumption or switch to substitutes when prices rise. Others are relatively inelastic: consumption changes little because the good is essential, habitual, or difficult to replace.

Many commodities fall into that second category. Households and businesses may grumble about higher prices, but demand for gasoline, power, industrial metals, or agricultural inputs often adjusts only slowly. When something is necessary for transportation, food production, housing, or industrial activity, demand tends to be less price-sensitive than it is in other parts of the economy.

Why Commodities Move So Much

This is what makes commodities so powerful, and at times so volatile.

Many commodity markets combine two features:

1. Relatively inelastic demand: Consumers and businesses often cannot materially reduce usage in response to short-term price moves
2. Relatively inelastic supply: Producers often cannot quickly increase output when prices rise

That combination means prices do much of the adjusting.

When a commodity market is hit by a sudden supply disruption, the burden of adjustment falls disproportionately on price. Droughts reduce crop output. Wars interrupt trade flows. Sanctions constrain supply chains. Weather, geopolitics, and underinvestment can all tighten supply suddenly. Because neither producers nor consumers can respond quickly, prices can spike sharply higher.

That is one reason commodities often behave differently from traditional financial assets. When growth fears intensify, equities and credit often fall. By contrast, a supply shock can drive commodity prices sharply upward at precisely the moment other assets are under pressure.

Skew Matters

That brings us to skew.

Not all return distributions are symmetrical. In financial markets, some assets are more prone to large downside moves, while others are more likely to experience occasional outsized upside moves.

Assets with extreme moves concentrated on the downside exhibit negative skew. Their return distribution has a longer left tail. Assets with extreme moves concentrated on the upside exhibit positive skew. Their distribution has a longer right tail.

From a portfolio-construction perspective, positively skewed assets are valuable because they can help when portfolios need it most. They may not deliver the highest average return, but they can provide powerful upside in periods of stress or disruption.

The table below shows the annualized returns, volatility, and skew of three major asset classes over the last 35 years: equities, proxied by the S&P 500; bonds, proxied by the Bloomberg Aggregate Bond Index; and currencies, proxied by the Dollar Index.

	Return	Volatility	Skew
Stocks	8.8%	14.7%	-0.56
Bonds	5.2%	4.1%	-0.32
Currencies	0.1%	7.9%	0.33

Both stocks and bonds exhibit negative skews, meaning their most extreme moves have tended to occur on the downside. That is intuitive: in periods of stress, investors often sell risk assets quickly, and even bond markets can reprice abruptly. The US dollar, by contrast, shows positive skew, which also fits intuition, as capital often moves toward perceived safe havens in risk-off episodes.

Now compare that with several commodities:

	Return	Volatility	Skew
Gold	7.7%	15.3%	0.26
Copper	4.7%	24.5%	0.10
Oil	3.7%	36.5%	1.18
Natural Gas	1.7%	55.1%	0.43
Corn	1.2%	27.5%	-0.08

The differences are telling.

Gold stands out because its long-term return has been surprisingly close to equities, with similar volatility, but with a more favorable skew profile. Oil is also notable. Its average return may not look especially attractive in isolation, particularly after adjusting for volatility, but its strongly positive skew can make it valuable in portfolios. It has the potential to turn a defensive allocation into an offensive one during supply shocks and inflationary episodes.

Not every commodity always exhibits positive skews, and not all commodities play the same role. But as a group, commodities offer exposure to a set of risks and outcomes that traditional stock-and-bond portfolios often lack.

Why We Own Commodities

This is why we continue to hold commodities in client portfolios over the long term.

The case is not that commodities are always high returning. Nor is it that they are always negatively correlated to other assets. The case is that they can provide a distinct source of return, one tied to real-world scarcity, inflation pressure, and supply disruption. Their behavior is different, and that difference has value.

In a world where portfolios are often dominated by assets with negative skews, commodities can add something rare: diversification with the potential for upside asymmetry when the macro environment becomes more difficult.

Sometimes, being inelastic is a very good thing.