Metals struggle as markets price peak hawkishness, not peak demand

• Metals remain under pressure as investors focus on higher funding costs, a stronger dollar and broad-based risk reduction across financial markets.
• Gold and silver continue to suffer from the prospect of higher-for-longer US rates, despite several long-term supportive drivers remaining intact.
• Copper has retreated towards key support despite ongoing inventory drawdowns and a constructive medium-term supply outlook.
• In our opinion we believe markets may be approaching peak hawkishness as falling energy prices ease inflation pressures and reduce the need for additional policy tightening.

Industrial and precious metals remain on the defensive as financial markets continue to adjust to the prospect of higher funding costs and a more restrictive US monetary policy outlook. The latest wave of selling has been amplified by a sharp correction across technology stocks, with today's 10% tumble in the tech-heavy KOSPI index and the Nasdaq slipping back below 30,000, triggering a broad reduction in risk exposure across asset classes.

The weakness highlights how metals are currently trading as financial assets first and commodities second. While long-term supply and demand fundamentals remain broadly supportive across several sectors, investors are focused on preserving capital amid rising volatility, elevated bond yields and a stronger dollar. In short, the market is currently paying more attention to the cost of money than the availability of metal.

Precious metals weighed down by funding costs

Gold's recent rebound proved short-lived, with prices once again drifting lower towards the critical USD 4,000 area. The primary headwind remains the market's reassessment of the US rate outlook following last week's hawkish FOMC meeting.

The combination of higher bond yields, a firmer dollar and expectations that policy rates may remain elevated for longer continues to challenge investor appetite for non-yielding assets. While still seeing higher prices at the end of the year, several major investment banks have lowered their gold forecasts in recent weeks, reflecting a more cautious outlook for bullion under a higher-for-longer rate environment.

From a technical perspective, the USD 4,000 to 4,100 area remains critical. A sustained break below that zone risks triggering a fresh wave of capitulation and momentum-driven selling following the sharp correction already seen from this year's record highs.

Silver has struggled even more than gold. The gold-silver ratio has climbed towards a three-month high around 66, underlining silver's dual role as both a precious and industrial metal. While gold continues to attract some defensive demand, silver has faced additional pressure from concerns about global growth and weaker sentiment towards industrial metals more broadly.

Copper faces macro headwinds despite supportive fundamentals

Copper has not escaped the broader risk-off environment. HG copper has fallen sharply and is once again approaching a key area of support around USD 6.15 per pound. The decline comes despite little evidence of a material deterioration in the underlying physical market. Visible inventories across the major futures exchanges continue to trend lower, while long-term demand projections linked to electrification, grid investment, data centres and artificial intelligence-related power demand remain supportive.

Instead, copper is suffering from the same macro forces weighing on most cyclical assets. Investors have reduced exposure to growth-sensitive sectors amid concerns about tighter financial conditions and weaker economic momentum. The technology-led equity correction has added to that pressure. Over the past two years, copper has increasingly become associated with themes such as electrification, AI infrastructure and surging power demand. As a result, periods of weakness across technology and growth-related equities now increasingly spill over into industrial metals.

The current correction serves as a reminder that even markets supported by constructive fundamentals remain vulnerable when financial conditions tighten and investors move to reduce risk.

Why we may be close to peak hawkishness

While markets are currently focused on the risks associated with higher funding costs, there are growing reasons to believe we may be approaching peak hawkishness in the current cycle. The most important development is the sharp decline in energy prices.

Since the signing of the interim US-Iran agreement and the gradual reopening of shipping routes through the Strait of Hormuz, crude oil prices have fallen sharply. Refined fuel prices have also retreated, removing one of the key upside risks to inflation that dominated market thinking only a few weeks ago.

Lower energy costs feed through the economy relatively quickly. They reduce transportation costs, ease pressure on manufacturing input prices and help moderate inflation expectations. In turn, this may challenge the market's assumption that the Federal Reserve will need to maintain an aggressively restrictive stance for an extended period.

The recent surge in speculative dollar longs also suggests that much of the hawkish narrative may already be reflected in current positioning. Should incoming inflation data begin to soften alongside falling energy prices, the dollar could struggle to maintain its recent gains. Such a development would be supportive for both precious and industrial metals.

Gold would benefit from lower real yields and a softer dollar, while copper and silver would likely find support from improved risk sentiment and expectations that financial conditions may become less restrictive.

Long-term support remains intact

While the current correction has been painful, it is important to distinguish between tactical market drivers and longer-term fundamentals. For gold, central bank buying, ongoing fiscal concerns, elevated debt levels and geopolitical uncertainty continue to provide structural support.

For silver and copper, the outlook remains tied to electrification, renewable energy investment, power grid expansion and growing demand from data centres and artificial intelligence infrastructure. None of these themes have disappeared. Instead, they have temporarily been overshadowed by concerns about monetary policy, funding costs and risk appetite, a focus that may continue to dominate in the short term as some of the stock market’s previously high-flying sectors undergo consolidation.

For now, markets remain focused on the short-term macro backdrop. However, if energy prices continue to retreat and inflation pressures ease, attention may gradually shift back towards the underlying fundamentals that continue to support the metals complex over the medium and longer term.