Private pension funds should now allocate 5% of their portfolios to commodities because the current economic expansion will be an extended one, creating increasing demand worldwide for commodities, recommend Abby Joseph Cohen and Steven Strongin, both vice presidents at Goldman Sachs & Co., in a report to clients.
"Commodities belong in a balanced portfolio, both on the grounds of diversification and expected yield," they say.
Overall, they recommend funds put 70% in equities, 25% in bonds, and 5% in commodities.
Aside from expectations of a huge demand for commodities, including natural resources, the two analysts note commodities' advantage as an inflation hedge adds another reason for allocating part of an investment portfolio to commodities.
Long economic expansions "have historically proven to be high risk for bonds, and commodities have proven a useful hedge against declining bond prices during these periods," they say.
They also note little capacity has been added in commodity-producing industries.