Commodities weekly: Metals pull back after a volatile, record-setting month for commodities

Energy: risk premium returns, but with political limits

Crude oil and the broader energy sector are heading for strong back-to-back weekly gains. US natural gas led the charge earlier in the month after a severe winter storm disrupted production and boosted heating demand, sending prices sharply higher in a move that highlighted how tight short-term balances can become when weather and infrastructure collide.

In crude oil, attention has once again turned to geopolitics. Renewed concerns about a potential US attack on Iran lifted fears of Middle East supply disruptions, briefly pushing Brent crude back above USD 70 per barrel and forcing a reassessment among traders who entered the year positioned for prices to fall into the USD 50s on expectations of a supply glut. Those fears have faded following a month of disruptions and could disappear entirely if Middle Eastern barrels were to become unavailable, even briefly. The rally served as a reminder that, despite ample spare capacity elsewhere and rising non-OPEC supply, oil prices remain highly sensitive to geopolitical tail risks, while also benefiting from their role as a liquid and easily accessible investment vehicle amid the current focus on demand for tangible hard assets.

That said, this risk premium is likely to remain volatile rather than directional. A key question for markets is not just whether tensions escalate, but whether US President Trump would be prepared to accept the political fallout from higher gasoline prices in an election year where affordability and inflation remain front-of-mind for voters. This political constraint may ultimately limit how far and how long a geopolitically driven rally can extend, even if headline risks remain elevated.

As a result, oil is likely to remain trapped between conflicting forces: geopolitical optionality on the upside, and political and demand-side considerations on the downside. For traders and investors alike, this argues for caution when extrapolating short-term price spikes into longer-term trends.

Metals: record highs meet reality

Precious and industrial metals experienced a week of frenzied trading before momentum abruptly faded. On Thursday, gold, silver and copper all hit fresh record highs, only to retreat sharply as broader risk-off signals emerged and the US dollar rebounded.

President Trump has nominated former Fed Governor Kevin Warsh as the next Federal Reserve chair. Warsh is widely viewed as more hawkish than several other names that have circulated, having previously resigned from the Fed in disagreement over unconventional monetary policy tools such as quantitative easing. Ahead of the announcements, equity markets reacted negatively, long-dated US Treasury yields edged higher, and the dollar recovered after hitting four-year low earlier in the week, triggering a sharp reversal across metals.

Copper provides a useful case study. Prices surged by around 11% to a record high of USD 6.58 per pound in New York before retreating sharply below USD 6. While longer-term macro themes such as electrification, energy transition and constrained mine supply remain supportive, several near-term micro drivers do not justify prices at such elevated levels. They include surging visible stocks monitored by the three major futures exchanges to a multi-year high, the spot to 3-month spread on the London Metal Exchange trading in contango, reflecting ample near-term supply, and the Yangshan copper premium over London trading at an 18-month low. With that in mind, the latest surge had a distinctly speculative flavour, increasing the risk of sharp pullbacks as positioning is reduced.

Gold and silver tell a slightly different, but equally important, story. Strong monthly gains have made trading conditions increasingly difficult. Market makers have grown reluctant to take and hold risk, resulting in thinner liquidity and wider bid-offer spreads. This was clearly visible on Thursday and Friday, when gold traded in a near USD 500 ranges and silver, first in a USD 15 range widening to a USD 23 range on Friday as profit taking and stop-loss selling took control. 

Such price action is not a sign of healthy, orderly markets. Instead, it reflects a breakdown in liquidity where relatively small flows can trigger outsized moves. In these conditions, both stop-losses and profit targets become harder to execute efficiently, raising the risk of being forced out of otherwise well-structured positions. While the underlying reasons for holding gold remain as strong as ever – including persistent fiscal and debt concerns, ongoing central bank demand, geopolitical uncertainty and the need for portfolio diversification – the surge this month has left the yellow metal vulnerable to a pullback. We expect any setback to be met with fresh demand, with USD 6,000 emerging as a potential next upside target over time.

Silver, meanwhile, may eventually struggle to keep pace with gold, not least given the slump in the gold-silver ratio meaning it can no longer be categorised as being cheap compared with gold. Its heavy reliance - in normal times - on industrial demand could become a drag as some end users, particularly within the solar sector, increasingly seek alternative materials in order to protect margins. In addition, a rise in scrap supply is expected in the coming months as owners cash in long-held bars, cutlery and jewellery following a seven-fold increase in prices over the past decade.  

Agriculture: selective strength amid broader caution

Away from metals and energy, agriculture has delivered a more nuanced picture. Wheat prices have moved higher amid concerns about winterkills in parts of the US and the Black Sea region. Cold weather risks, combined with uncertainty around snow cover, have added a weather premium at a time when global stocks are already tighter than in recent years.

Higher energy prices also provide indirect support through biofuel linkages and rising input costs, although this remains a secondary factor rather than a primary driver. Elsewhere in the agricultural complex, performance has been mixed, with some soft commodities continuing to lag after last year’s extreme price moves highlighted how quickly demand can be destroyed when prices overshoot.

A month to remember, a market to respect

January’s performance has reinforced commodities’ role as a diversifier at a time of elevated geopolitical and macro uncertainty. The breadth of the rally is notable, and the longer-term case for hard assets remains intact. However, the speed and violence of recent moves, especially in metals, call for respect.

This is a market where patience, discipline and flexibility matter more than conviction alone. Volatility is no longer a background feature; it is shaping behaviour, liquidity and outcomes. As we move into February, the key question is not whether prices can go higher, but whether markets can do so in a more orderly fashion. Until liquidity improves and volatility subsides, caution remains warranted.

That said, we believe the long-term investment case for commodities remains strong, underpinned by structural trends such as deglobalisation, rising defence spending, de-dollarisation, decarbonisation and currency debasement, and reinforced by rising power demand, population growth, climate pressures and years of underinvestment by producers. From its pandemic low in 2020, the Bloomberg Spot Index has risen 143%, a strong recovery but still modest compared with the major supercycles of the 1970s, when the index gained around 700%, and the late 1990s to 2008, when the industrialisation of China and India drove a decade-long rally of more than 450%.