Why it is commodities’ turn to shine

SINCE the Iran conflict broke out about a month ago, the volatility of risk assets has been on full display. Global equities have whipsawed by 6 per cent since the start of the war, while dated Brent (spot price) has traded as high as about US$141 per barrel – the priciest since the 2008 financial crisis.

For now, absent a clear road map towards an end to the war, hedging as a tactical investment approach – across regions and asset classes – is back in vogue.

Enter commodities, which have risen 17 per cent year to date. While investors have mostly focused on oil prices as a bellwether for the war’s next possible trajectory, we think that the wider commodities asset class represents a crucial inflation and geopolitical hedge.

Although individual commodities can exhibit volatile performance, their inherently diverse characteristics – across metals, energy and agriculture – result in differing responses to macroeconomic conditions.

Consequently, a broad allocation to commodities is materially less volatile overall, similar to global equities.

Overall, we think active commodity strategies offer an effective way for investors to diversify their portfolios amid today’s elevated geopolitical risks and energy market disruptions.

Active positioning could also shield portfolios if second-order effects materialise, such as growth concerns and if the Fed cuts more than expected.

Energy: crude still elevated

Today, energy markets remain at the epicentre of disruption. Brent crude futures prices are averaging north of US$100 per barrel since the escalation, versus a five-year average of US$81 per barrel.

The Strait of Hormuz remains a flashpoint, creating knock-on restrictive effects on other energy sources, including liquefied natural gas, coal, renewables and nuclear.

Crucially, national energy security is now top of mind for governments. Even if the Iran war hypothetically ended tomorrow, many structural trends in power generation and storage would be boosted, due to the push for energy security, resulting in the hoarding of fossil fuels.

Within power and resources, we favour high-quality companies with resilient and defensive growth profiles.

With crude oil exports still roughly 10 million barrels a day below pre-conflict figures, this persistent trend is lowering global inventories. As a result, oil prices could continue to rise if flows through the Strait of Hormuz remain restricted.

With global oil inventories currently falling by 300 million to 400 million barrels in a month, higher oil prices will aim to curtail demand to bring the market back in balance.

Additionally, the rationing of supply and cancelled flights in some places are already becoming visible.

If the disruption lasts longer, prices could overshoot in the short term and trigger significant demand destruction, with Brent likely trading above US$150 per barrel.

We remain concerned that scarcity fears could trigger hoarding activity, further amplifying price movements.

Industrial metals: demand recovery pushed out

Meanwhile, industrial metals have faced lacklustre demand, with Chinese consumption moderating and growth in Western economies slowing. Earlier this year, prices moved ahead of actual usage, leaving the rally dependent on robust demand growth ahead.

The energy price spike following the Iran war could dampen near-term activity, as history shows that materially higher energy costs tend to reduce industrial demand by roughly one percentage point.

But while industrial metal demand – such as copper – remains under near-term pressure due to these conditions, we see reasons for optimism ahead.

As geopolitical risks subside and capital flows into infrastructure and electrification projects increase post the current energy crisis, demand for copper and aluminium should strengthen. We anticipate copper reaching US$14,500 per tonne by end-2026.

In short, while industrial metals could be hurt by growth downgrades, we see a recovery ahead, thanks to supply constraints and structural demand for electricity infrastructure.

Stay the course in gold

Asian investors need no introduction to their favorite precious metal. While gold’s price initially plunged amid the Iran war, a rebound has surfaced, bolstered by US rate expectations rolling over, positive US dollar momentum fading and dovish Fed signals.

Overall, we see the current correction as a temporary adjustment. With Treasury yields forecast to fall to 3.75 per cent and the EUR/USD to strengthen to US$1.20 by year-end, we still expect gold to recover, targeting US$5,900 per ounce by late 2026.

Long-term investors should view gold’s price movement as a deferred hedge. For investors with an affinity for gold, we favour allocating a small portion (around mid-single digits) of total assets to help diversify portfolios.

As growth slows and central banks eventually pivot, gold’s traditional drivers – such as lower real yields and increased liquidity – should reassert themselves.

Amid higher gold prices, we expect a positive knock-on effect on other precious metals, such as silver, platinum, and, to some extent, palladium – which have also come under pressure recently.

Until this turning point for gold materialises, we believe that selling volatility is an attractive strategy to capitalise on limited price downside for silver and platinum and generally elevated option volatility.

Agriculture: be selective

The outlook for agriculture remains constructive, as geopolitical risks and uncertainty in crop input markets keep upward pressure on prices.

The US Department of Agriculture reports on planting and stocks highlight a further tightening of fundamentals, though market sentiment indicates these factors are largely anticipated. Food supplies have also traditionally been raised during geopolitical conflicts.

At the same time, despite the 2025 La Nina officially ending, the recent rise of the Southern Oscillation Index raises concerns about a redux, and weaker yields in the Americas as a result – especially for corn and soybeans.

Livestock supply remains highly stretched. US cattle inventories are at their lowest in decades, keeping beef prices high, while global supply chains are further complicated by trade issues.

Hog markets are also tight, with ongoing herd health problems limiting any meaningful increase in sow populations. We see opportunities, including in lean hogs, to re-engage in the sector as we approach mid-2026.

To conclude, investors should seize advantage of the changing macroeconomic landscape and broad commodity price trends by dynamically adapting their overall exposure to the asset class.

An active, selective investment approach can help investors navigate commodity markets more effectively versus passive strategies.

The writer is head of investment advisory and content of Apac, UBS Global Wealth Management Chief Investment Office