Volatility shocks, forced deleveraging and their temporary impact on in-demand commodities

Over recent weeks, the technology sector—especially AI‑linked names—has begun to show signs of fatigue. An almost parabolic run pushed forward earnings well above long‑term norms, raising the risk of a reset, and the past week has brought the first meaningful wobble. Despite a modest top‑to‑bottom decline of 4.3% in the Nasdaq 100 future—small against a year‑to‑date gain above 20%—the shift in tone is notable.

The combination of elevated valuations, narrow market breadth, circularity in AI investment flows, and heavy concentration in a handful of mega‑cap names, alongside warnings from major bank CEOs of a potential 10–20% equity drawdown, has added a layer of near‑term unease. An orderly correction can become disorderly if too many investors try to exit at once, driving volatility higher and forcing leveraged traders to reduce exposure across the board. 

Episodes of sharp volatility remain one of the most underestimated transmission channels between equity market stress and commodity price action. When a stock-market correction causes volatility to rise abruptly, the knock-on effects can extend far beyond equities. The key reason is mechanical: a large share of institutional portfolios now targets a specific level of volatility or risk. When that volatility jumps, these mandates must cut exposure, and they typically do so across the board, and even positions supported by strong fundamentals are temporarily pulled into the downdraft.

The logic is straightforward. Volatility-targeting, risk-parity and similar systematic strategies scale their gross exposure according to realised or implied volatility. When volatility rises, the amount of allowable leverage falls. That reduction must be executed regardless of whether the underlying positions are profitable or loss-making. During stress, investors sell what is liquid and sizeable, not necessarily where the risk originated. As a result, the dash-for-cash leaves no position unscathed with the most liquid ones being treated as sources of immediate cash rather than strategic holdings. This is why deleveraging tends to hit every corner of the portfolio simultaneously, including commodities.

Gold is currently undergoing a consolidation phase following a strong rally that accelerated in August, driving a nine-week rally of more than 30% to a fresh record near USD 4,400 before suffering a near 500-dollar correction. From a technical perspective, the market has yet to test levels that would signal a deeper corrective phase or an end to the structural bull trend. However, that does not insulate it from temporary liquidation flows if volatility spikes, or simply if the general level of risk appetite takes a hit as we saw in Tuesday’s session. 

The volatility shock in early April remains the clearest recent example. Following a round of surprise U.S. tariff announcements, the CBOE Volatility Index (VIX) almost tripled from around 21% to 60% within three days, while the S&P 500 dropped roughly 15% over the same window. With bond-market volatility also surging, every liquid asset became a candidate for raising cash. Gold fell 6.6% from top to bottom, despite entering the episode with strong bullish momentum. Silver, with its partial dependence on industrial demand, tumbled 17%. Yet both metals recovered rapidly once volatility stabilised. Gold printed fresh highs within a week—an illustration of how quickly fundamentals can reassert themselves once forced flows subside.

The current risk backdrop still carries the potential for another volatility event. However, with precious and industrial metals—two of the most popular and therefore most exposed sectors—already having undergone a meaningful correction, the risk of a sudden volatility‑driven liquidation shock has eased somewhat. Even so, they remain vulnerable to brief, mechanically driven selling but typically recover quickly once the volatility impulse fades.

In the near term, the key risk to monitor is a decisive revaluation of the AI complex, which could spill over into broader equity benchmarks, lifting volatility and triggering another round of deleveraging. For commodities, the implication is straightforward: even markets supported by solid fundamentals but carrying elevated speculative length may face temporary downsides driven by forced flows rather than any material shift in their underlying outlook.

For gold and other investment metals, the core support remain unchanged: fiscal uncertainty, sticky inflation, steady central-bank and investor demand, a gradual drift toward lower real rates, and persistent geopolitical hedging. Industrial metals continue to benefit from structural demand tied to deglobalisation, electrification, grid expansion and the rapid build-out of data-centre infrastructure spiced with persistent underinvestment in new mine capacity. Copper, given its sensitivity to AI-related investment cycles, may shed some speculative froth if the sector experiences a setback, though such a scenario remains unlikely. In all cases, these underlying drivers tend to reassert themselves quickly once volatility settles and positioning normalises.

The message is simple: volatility events temporarily distort price signals across commodities, but they rarely alter the underlying trajectory of markets that enjoy robust macro and micro foundations.