US midterm shock: Gold rallies, oil slides as copper reassesses tariff risks

Key Points:

• Democratic sweep reshapes the outlook: A decisive midterm victory raises the prospect of political gridlock, weakening the dollar and Treasury yields while broadly supporting commodities. 
• Gold and silver lead the gains: Lower yields, dollar weakness and short covering support precious metals, with gold reclaiming key resistance at USD 3,970. 
• Copper reassesses tariff risks: Reduced prospects for US refined copper tariffs could ease global supply distortions, potentially offsetting supportive long-term fundamentals. 
• Oil retreats on hopes of an Iran deal: Political pressure to lower energy costs raises hopes for a negotiated settlement, although Trump's continued foreign policy authority leaves escalation risks intact.

The Democrats' sweeping victory in the US midterm elections has delivered a major political setback to President Donald Trump, with the party set to secure larger-than-expected majorities in both the House of Representatives and the Senate. The scale of the swing is remarkable, particularly in states that backed Trump strongly just two years ago, highlighting voter frustration over alleged corruption, the cost of living and the war in Iran. The result raises the prospect of two years of political gridlock, with Trump's domestic agenda facing considerable resistance, even as he retains substantial executive authority over foreign policy and trade.

Commodity markets have responded broadly positively, with gains led by industrial and not least precious metals, generally supported by a weaker dollar and lower Treasury yields. The Bloomberg Dollar Spot Index has fallen around 0.5%, its biggest daily decline in two months, while bond yields have retreated amid expectations that a Democrat-controlled Congress could constrain further fiscal expansion. Additional weakness across energy markets has reinforced the decline in yields by easing inflation concerns.

However, the implications are far from uniform. Precious metals have emerged as the immediate winners, copper faces a reassessment of US tariff policy and future demand, while oil traders are increasingly focused on whether Trump's political defeat might accelerate efforts to end the Middle East conflict.

Gold and silver benefit from weaker dollar and falling yields

Gold and silver have been among the strongest performers following the election, supported by dollar weakness, declining Treasury yields and renewed short covering. The prospect of a divided government has encouraged expectations that further fiscal expansion could become more difficult to implement.

For gold, this represents a potentially supportive development following the recent sharp correction triggered by broader market deleveraging, rising energy prices and weakness across technology stocks. Having broken below important support at USD 3,970 last week, gold has reclaimed that level, forcing momentum-driven short sellers to reassess their positions. The recovery has also brought the downtrend in place since August into focus, with a sustained break potentially encouraging further buying.

The longer-term implications also appear broadly supportive. Hopes for lower energy prices could ease inflation concerns, potentially allowing the Federal Reserve to shift its focus from containing inflation towards supporting economic growth. Meanwhile, political gridlock could introduce fresh uncertainty surrounding government funding, debt negotiations and the fiscal outlook.

For now, the focus remains on whether the recovery can attract renewed investor demand beyond short covering, with the dollar, Treasury yields and Fed expectations likely to determine the next move.

Silver has followed gold higher, but has yet to break technical levels that may trigger short covering and fresh demand, benefiting from its greater volatility and sensitivity to investor sentiment. However, its additional exposure to industrial demand means that concerns about global growth and technology investment could continue to influence its relative performance.

Copper faces a tariff rethink despite supportive long-term fundamentals

Copper initially slumped towards a near four-month low around USD 6.27 per pound, before recovering to trade near USD 6.46, highlighting the competing forces influencing the market. One concern relates to the outlook for artificial intelligence and data-centre investment. Following an extended period of strong expectations for electricity infrastructure demand, the sector may face greater political and regulatory scrutiny, potentially raising questions about future investment.

At the same time, Democratic control of Congress could support electrification and renewable energy by protecting existing incentives and limiting further attempts to reverse clean-energy policies. However, with Trump retaining his veto power, substantial new legislation may prove difficult to achieve.

More importantly for copper in the near term is the potential impact on US import tariffs. The administration had previously considered imposing tariffs on refined copper imports from January 2027, contributing to a substantial accumulation of copper in US warehouses. These inventories have effectively been removed from normal international circulation, tightening availability elsewhere and contributing to exceptionally elevated physical premiums, particularly in China.

Following such a decisive election defeat, and with affordability becoming an increasingly important political concern, the likelihood of additional tariffs on refined copper may have diminished. This could reduce the incentive to retain large inventories in the US and eventually encourage material to flow back towards international markets. Such a development could ease the tightness currently reflected in Chinese import premiums and London Metal Exchange spreads. Importantly, however, it would represent a redistribution of existing inventories rather than an improvement in global mine supply, which remain challenged amid strong demand from electrification, grid investment and other infrastructure projects.

Against this backdrop, the longer-term uptrend appears intact, although the election outcome could trigger a prolonged period of consolidation as traders reassess tariff risks, inventory flows and the outlook for US demand.

Oil retreats as attention turns towards a possible Middle East settlement

Crude oil prices have resumed their decline, falling USD 11 in the past three days, as the market increasingly appears to be betting that Trump may seek to put the Middle East conflict behind him following the election setback. With energy affordability having become a major political issue, a negotiated settlement with Iran that allows regional energy flows to normalise could offer the administration an opportunity to ease pressure on consumers and demonstrate progress on a major foreign policy challenge.

Recent developments have encouraged hopes of a diplomatic breakthrough, although significant differences remain between Washington and Tehran. Importantly, Trump's reduced domestic political influence does not necessarily constrain his ability to act internationally. Indeed, a president facing legislative gridlock could become more reliant on executive authority and foreign policy initiatives, leaving the risk of renewed escalation firmly in place.

Meanwhile, recovering crude shipments from the Middle East have begun to weigh on physical cargo prices, potentially accelerating the normalisation of refining margins and ultimately lowering fuel prices. However, for consumers to experience the full benefit, refined product exports from Middle Eastern refineries must also recover. So far, this rebound remains notably subdued, suggesting that relief at the pump may take longer to materialise than the decline in crude prices alone would indicate.

Natural gas faces similar challenges. European and Asian markets remain highly sensitive to Middle East developments, but even a full reopening of regional shipping routes would not immediately restore LNG deliveries. With Europe entering winter amid a significant supply shortfall compared with recent years, weather conditions and demand will remain critical drivers.

Political change does not guarantee an immediate policy shift

The election has fundamentally altered the US political landscape, but its consequences for commodities will depend on how Trump responds and which policy changes ultimately materialise. The newly elected Congress will not take office until January, leaving a period during which the outgoing administration and lawmakers retain opportunities to act.

For now, precious metals are benefiting from the immediate monetary response, copper is reassessing tariff-related supply distortions, and energy markets are increasingly focused on the possibility of a negotiated end to the Middle East conflict.