Commodity Watch: Portfolio Insurance

AHMAD AL-SATI
PORTFOLIO MANAGER

Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York. 

Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser. 

In 1961, the mathematician and meteorologist Edward Lorenz, rounded an input in a 12 variable weather model from 0.506127 to 0.506. The small change caused a vastly different result. That experiment underpinned Chaos theory and the butterfly effect (which Lorenz was known for). Chaos theory is not about randomness. Rather, it describes deterministic systems that are highly responsive to small changes in initial inputs. Weather’s sensitivity to inputs, for example, makes long-term forecasts worthless. Thus, you need tornado, hurricane and flood insurance (if you can get it).

Long term predictions of financial markets are also difficult. Small initial modifications can cause large changes across the economy upending years of successful investment approaches. Insurance is key. Hedging portfolios is one form of insurance. Diversification is another. 

The 60-40 portfolio helps. So do commodities. Studies show commodities in a portfolio reduce risk without lowering returns. Commodities have low correlation to bonds and have had the best 10-year stretch when equities had their worst. Commodities are real assets with a positive correlation to inflation and their value tends to increase during geopolitical crises (a multi-polar world may increase those). Each commodity also has its own price drivers. Oil usually performs well in bull markets, while precious metals usually perform well in bear markets. Agricultural products and metals, on the other hand, seem to provide more consistent diversification benefits.

Financialization (the increased use of commodities futures by financial actors), however, has limited the benefits of commodities futures in portfolios. Financialization turns commodities into another financial asset subject to volatility and drawdowns. It makes them more correlated to equities, susceptible to financial shocks and less correlated to inflation. Financialization effectively severs the futures market from the real-world, hard asset benefits, of commodities to a portfolio.

Credit may provide an alternative. Structured correctly, credit means direct exposure to commodities and their increased margins during crises. Private transactions lower volatility and generate cashflows distinct from those in the private credit markets today. Many are self-liquidating, short duration in nature and secured by valuable hard assets. Trade finance, direct lending and royalties are examples. In some transactions, the cyclicality is a feature not a bug because it allows experienced lenders to structure transactions that mitigate against the downside and participate in any upside. Conditions currently seem ripe for this approach as substantial demand meets limited competition.

Whether the heightened volatility of the last 6 weeks is a harbinger of a new investment regime or not, diversification should be a net positive to portfolios. Commodities have a long-established role as a diversifier. The right approach will be key.

The following is an extract from a LinkedIn post by Ahmad Al-Sati from 11/05/2025.