In institutional portfolios: The 60-40 portfolio is obsolete – investors are rediscovering commodities

For a long time, commodities were overshadowed by other asset classes, even among institutional investors. This is likely to change: There is much evidence that the markets are at the beginning of a new commodity cycle. In addition to the current macroeconomic upheavals, historical patterns can be identified that suggest that the price development of gold over the past year and a half should be viewed as a signal.

Gold is a leading indicator in the commodity cycle

Gold has never been an isolated beneficiary in times of global uncertainty, as historical patterns show. Rather, its price has always been at the forefront of a broader upswing in precious metals and commodities as a whole. This time, too, gold is leading the way. Its price has increased significantly since the beginning of the pandemic.

A comparison with the S&P 500 underscores the trend. The ratio of commodity to equity market performance is at a historic low. In the past, this was a reliable early indicator of a trend reversal and the beginning of a capital rotation. However, many investors are currently still focusing on the previous winners – especially technology stocks.

The interest rate environment requires new answers

History also teaches us that most investors only enter a trend once it's already established. However, it's often in the early stages of a cycle that the greatest return opportunities arise. At the same time, the changing macroeconomic environment is forcing more than just institutional investors to rethink their approach. The era of falling interest rates, which lasted for over four decades, is over. Since 2020/2021, we have found ourselves in a structurally new interest rate environment characterized by rising interest rates, elevated inflation, and volatile capital markets.

In this reality, traditional bonds are declining in importance. Commodities and precious metals, on the other hand, offer exactly what portfolios now need: inflation protection, real value growth, and diversification. Gold, for example, has achieved an average annual return of more than 8 percent since 2000 – more than many interest-bearing or coupon-bearing securities.

Especially in times of monetary uncertainty and growing inflation concerns, gold offers not only value preservation but also long-term appreciation . While traditional bonds are under pressure, institutional investors seeking sustainable and resilient portfolio building blocks find it an alternative.

Impulses from China

In addition to fundamental arguments, political signals are increasing: In China, insurers have recently been allowed to hold up to one percent of their portfolios in gold. This is a move with potentially global implications. In Russia, platinum and palladium have been added to strategic reserves alongside gold. In Asia, there is also growing physical demand: Silver is traded in Shanghai at premiums compared to Western exchanges. Such developments argue for a strategic repositioning of precious metals, both in government reserves and in institutional portfolios.

Silver: the underestimated cyclical

Historically, silver has been a late bloomer. In early commodity cycles, it generally reacted with a delay, but in the later phase of a bull market, it boomed, often achieving double-digit annual returns. The current gold-silver ratio of 101 indicates a significant undervaluation of silver; during historical peaks, the ratio was between 15 and 45. In addition, industrial demand for silver is currently rising rapidly . Applications in photovoltaics, semiconductors, sensors, and innovative battery storage systems are structurally increasing demand.

At the same time, available inventories on the Comex and LME commodity exchanges are falling to critical lows—a potential catalyst for price movements. Making matters worse is the fact that silver is only eight times more abundant than gold. In the past, the gold-silver ratio was only higher than it is now only once. That was in 2020—and the reversal led to a strong outperformance of silver over gold.

Underinvested and underestimated

Despite these fundamentals, capital flows into gold and silver ETFs show that many investors are still holding back. A large portion of investors are watching from the sidelines. Many prematurely interpret gold price fluctuations as an end to the trend. But such corrections are part of every bull market.

The current skepticism of many investors is less a warning signal than a classic symptom of the so-called "wall of worry" – the oft-cited fear among investors that they are already too late. Rather, it demonstrates that there is still upside potential. The wall of worry is a barrier that a major trend must overcome. In other words, as long as there are still many doubters and hesitant market participants, the potential has not been fully exploited.

Capital rotation: early phase, great opportunity

On the contrary: We are in the early stages of a movement that could continue to have strategic relevance for years to come. The rotation of capital from overweight sectors like technology into commodities is already underway, but not yet complete. Such transitions are typically characterized by high volatility coupled with underestimated potential. The markets are reorganizing, and many investors are still acting reactively rather than proactively. Those who build positions at this early stage are securing attractive entry levels.

Institutional investors, given their unique position, are at a turning point: The classic 60-40 portfolio has reached its limits. Traditional sources of return are losing traction, while geopolitical risks, regulatory changes, and structural market shifts are increasing. In this context, commodities and precious metals are not just tactical additions, but increasingly an indispensable component of strategic allocations.

About the author:

Cornel Bruhin has been responsible for the development and further development of emerging markets strategies at Mainfirst since 2012 and manages the Mainfirst Emerging Markets Corporate Bond Fund Balanced. Previously, he worked at Clariden Leu, Bank Hofmann, and Credit Suisse First Boston. He has more than 37 years of experience in emerging markets investments.