The research on commodity returns suggests that commodities react to economic factors in ways that are different from stocks and bonds. If concerns about inflation, or concerns in the economy cause stocks to drop, hard commodities such as metals and crude oil, along with soft commodities like grains might rise in value and smooth out a portfolio return.

A major 35-year study of market portfolios by Iszorek found that during the eight years that stocks lost value by 12%, commodity returns were actually up 9%. In the seven years that portfolios divided equally between stocks and bonds had losses, commodities were positive by 16%. During the two years that bond portfolios lost, commodities were up almost 21%. With a 10% allocation of a portfolio into commodities, an investor can expect an additional 2% of added return for the overall portfolio return with a limited amount of risk.

The price of gold represents an excellent example for investors. In 1999, all commodities’ prices measured in inflation-adjusted terms, reached levels equal to those of the lows experienced in the 1930’s. The price of gold hit a low of $250/ounce in 1999. But, it tripled in value by May of 2006 and has returned 20% to investors over the past eight years.

An allocation of one's portfolio to commodities of at least 10% can provide excellent diversification for portfolios, especially during significant periods of loss in equities during bear markets.