Investopedia is a great reference tool, particularly for those new to finance. But once in a while it provides advice that may not be entirely accurate. In an article entitled "Commodities: The Portfolio Hedge" Investopedia tells you why commodities help "diversify" your portfolio.
Investopedia: Commodities tend to bear a low to negative correlation to traditional asset classes like stocks and bonds....
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| Source: Investopedia |
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| Correlation between the CRB Commodity Index (or equivalent basket of commodities) and US equities (historical correlation of monthly changes, three-year window, source: Credit Suisse) |
In a crisis a commodity basket may not be very effective in providing the diversification one would expect from historical correlations (reaching 80% in the recent crisis as commodities sold off with equities). The same thing happened in 1929. There is nothing wrong with having commodities in a portfolio of assets. One simply needs to be aware of the reasons the asset class is part of it. And the key motive to be long a broad basket of commodities is to protect against inflation, not to try "diversifying" the portfolio.
Update: Good comment from Kostas Kalevras:
There's basically a whole story about how Gorton et al 2004, induced institutional investors such as pension funds to invest in commodities futures as a hedge againt other asset classes. This investment was made through index funds and creates a perpetual long position on the underlying commodity futures. The liquidity injection was so large (of the order of $300bn by 2008) that it pushed oil and commodity futures to a contango situation playing a role in price increases as well as price volatility (due to the funds leaving partially after Lehman).
The process has been documented by various commentators, including the Fed:
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