Author: Miscellaneous Talks on Seeing the Big Picture from Small Details

Last night I read a recent weekly metals report from JPM, which mainly discussed the interplay between "safe-haven selling" and "supply shocks" faced by major metal commodities amid the disruption of shipping in the Strait of Hormuz.

Key conclusions:

1. Gold: Short-term "oversold", long-term bull market

The core contradiction: safe-haven appeal vs. liquidity crisis

Short-term pressure ("Sell everything" mode): The recent drop in gold prices is not due to a failure of safe-haven demand, but rather to investors indiscriminately selling all assets (including gold) to raise margin and cash during market panic (a surge in the VIX index). Data shows that when the VIX is above 30 and rising, the probability of gold rising on a weekly basis is only 45%, with an average negative return.

Tactical entry point: Historical data shows that such panic selling typically lasts about 10-15 days. Starting from the third day after the sell-off, gold prices often begin a rebound that lasts for about a week, with an average increase of more than 2%.

Long-term logic (bullish outlook): If energy disruptions persist, high inflation coupled with the risk of economic recession (stagflation) will force the Federal Reserve to shift to easing policies to protect employment. This combination of "stagflation + interest rate cuts" will become the macroeconomic backdrop for an "extremely bullish" outlook for gold.

2. Aluminum: The most reliable first choice for going long.

Core logic: A supply-driven super bull market

Fragile supply chains: Middle Eastern aluminum smelters are highly dependent on imported alumina (raw materials) and exported finished products. The closure of the Strait of Hormuz has severed the two-way flow of raw materials in and finished products out.

Production cuts are inevitable: Even if some manufacturers (such as Qatalum) temporarily maintain 60% capacity, their raw material inventories can only support them for 30-50 days. If shipping does not resume, large-scale production cut announcements will be seen in the coming weeks.

Price target: Supply disruptions will push aluminum prices rapidly toward above $4,000/ton.

3. Copper and Nickel: High risk, but different buffer periods

Common risk: Disruption of the sulfur supply chain.

The Middle East supplies 50% of the world's seaborne sulfur, which is a key raw material for the production of sulfuric acid, and sulfuric acid is the lifeblood of hydrometallurgical copper (SX-EW) and high-pressure acid leaching of nickel (HPAL).

Copper (leaning towards pessimism):

Risk: Production in places like the Democratic Republic of Congo (DRC) may be affected, impacting approximately 7% of global supply.

Buffer: Inventory plus the transportation chain provides a 4-6 month buffer period. Before a real supply shortage occurs, the market will first trade in expectations of a macroeconomic recession, and copper prices may fall initially.

Nickel (neutral to bearish):

Risk: The Indonesian HPAL project relies on the Middle East for 80% of its sulfur, with a buffer period of only about one month.

Positioning: Its impact level falls between aluminum (best performing) and copper (slightly bearish). While costs may surge, the main risk at present remains a sell-off driven by macro sentiment.

I. Gold and Market Pressures – The Risk of Contagion Before a Price Surge

Entering the second week of the Iranian conflict, aluminum remains our most bullish base metal , as we believe it is approaching a very bullish, supply-driven event tipping point as long as shipping disruptions in the Strait of Hormuz continue.

Copper supply also faces the risk of disruption via the sulfur supply chain , which could ultimately affect approximately 1.8 million tonnes of cathode copper production in the Democratic Republic of Congo (DRC), representing about 7% of global supply. Despite the large supply volume involved, given the relatively long supply chain from sulfur to the DRC, we believe the first layer of risk still leans towards a sharp price drop following a reassessment of the macroeconomic outlook before supply disruptions become the primary concern.

Nickel also faces supply vulnerabilities related to sulfur . Indonesia produces approximately 460,000 tons of nickel using the high-pressure acid leaching (HPAL) process, accounting for 12% of global nickel supply, and relies on sulfur imports from the Middle East.

Although nickel may have a smaller buffer than copper, in our view, aluminum misalignment and disruption remain the most significant supply risk at present.

Gold prices have fallen about 6% since before the war began, raising questions about its safe-haven status. A rebounding dollar and cooling market expectations for a Federal Reserve rate cut (accompanied by rising inflationary pressures from rising energy prices) are contributing factors, but most of the sell-off occurred last week, stemming from a widespread contagion effect of investors distancing themselves from risk.

During periods of market stress, gold is initially caught up in "sell everything" trades . We explore this initial contagion risk in more detail below, along with gold's historical performance before and after these events, as a tactical reference for periods of high volatility.

While gold may remain vulnerable to the risk of contagion in the short term, we still believe that the longer the energy disruption lasts, the greater the impact on inflation and even economic growth, and the outlook for gold is likely to quickly turn significantly bullish, especially when the Federal Reserve shifts to a more accommodative stance due to its dual mandate on the employment front.

II. Base Metals – Different Supply Chain Buffers Due to the Long-Term Closure of the Strait of Hormuz Lead to Differentiated Initial Impacts

Aluminum remains our most favored base metal for bullish positions.

Qatalum, the first Persian Gulf aluminum smelter to announce production cuts on March 3, has adjusted its plans this week, stating that it will maintain its capacity at 60% (approximately 650,000 tons per year) provided it has sufficient natural gas supply.

While this slightly reduces the current potential supply losses, the plant is still unable to ship across the Strait of Hormuz and relies on imported alumina. Assuming it has 20-30 days of alumina inventory at full capacity, reducing utilization to 60% means the inventory could be extended to 30-50 days ; however, a decision on further shutdowns will need to be made several weeks before the alumina inventory runs out.

Overall, we believe this does not substantially change the fact that aluminum is approaching a supply-driven bull market while the Strait of Hormuz remains effectively closed. If shipping restrictions fail to ease in the coming weeks, we expect more production cut announcements, turning market misalignment into a more severe and persistent supply disruption, and aluminum prices could quickly rise above $4,000 per tonne before a demand-driven pullback.

Copper also faces supply chain issues, but the buffer before the disruption may be greater.

Despite declining risk appetite and a strengthening dollar, copper prices have so far demonstrated remarkable resilience. One supporting factor may be the supply risk posed by disruptions to the sulfur supply chain— 50% of global seaborne sulfur comes from the Middle East .

Sulfur and its downstream product, sulfuric acid, are key to solvent extraction-electrowinning (SX/EW) copper production, a process that produces approximately 5 million tons of copper annually, accounting for 18% of global refined copper production. Chile primarily imports sulfur from Canada, the United States, and Turkey, while last year , almost all of Southern Africa and the Democratic Republic of Congo's sulfur imports came from the Middle East .

Figure 1: Percentage of Copper Production by Solvent Extraction-Electrowinning (SX/EW) Method in Various Countries

According to CRU data, Congo relied on imported sulfur combustion to supply nearly 3.6 million tons (60%) of its sulfuric acid demand last year. Based on the SX/EW acid strength, which requires approximately 1.93 tons of acid to produce 1 ton of cathode copper, this could impact Congo's SX/EW copper production by up to 1.8 million tons, representing 7% of global refined copper supply.

Figure 2: Estimated Supply and Demand Balance of Sulfuric Acid in the Democratic Republic of Congo

However, the buffer period before the disruption could be quite long . CRU estimates that there are about 2-3 months of elemental sulfur stocks in the region, plus a 1-3 month shipping cycle from the Middle East, so there could be a 4-6 month stock buffer period before downstream copper production is significantly affected.

Furthermore, by adjusting the ore processing sequence and leaching conditions, the net acid strength can be reduced, thereby offsetting some of the impact on copper in the future. Therefore, a substantial disruption to the SX/EW copper supply in Congo may require a prolonged closure of the Strait of Hormuz, which would also have severe macroeconomic and demand consequences.

In summary, for copper, this is more of a matter of timing. Although the risks involve a large supply volume, given the relatively long buffer period in its sulfur supply chain, we believe that the first layer of risk still leans towards a sharp price drop due to a reassessment of the macroeconomic outlook before supply disruptions become critical.

Indonesian nickel HPAL production also faces risks.

After being converted into sulfuric acid, sulfur is also a crucial input for high-pressure acid leaching (HPAL) nickel production. Indonesia faces the greatest production risk due to several factors, including: 1) the country relies on imports from the Middle East for nearly 80% of its sulfur demand; and 2) its supply chain buffer may be smaller than that for copper, with transportation from the Middle East taking approximately one month.

Last year, Indonesian producers produced approximately 460,000 tons of HPAL, accounting for 12% of global nickel supply. While cost is also a factor, with chemical inputs (including acids) accounting for nearly 60% of the cost of Indonesian HPAL, these operations are typically low-cost (below $8,000/ton), so a complete disruption remains the main bullish supply risk for the market.

In our view, nickel is positioned between aluminum (bullish) and copper (bearish) in the initial impacts of the prolonged closure of the Strait of Hormuz. The fact that major HPAL producers have reportedly stopped delivering long-term contracts highlights that substantial production is beginning to face supply chain pressures.

However, for a true supply shock to occur, it may still take several months for the Straits to be disrupted. Similar to copper, this would first trigger a general drop in nickel prices due to demand/macroeconomic concerns, before a supply rebalancing would take place.

III. Gold – Be wary of a sharp drop due to risk aversion before stronger catalysts emerge.

Over the past two weeks, we've been repeatedly asked about gold: Why hasn't it performed like a safe-haven asset (it saw a significant pullback at the beginning of last week and came under pressure again this weekend)? What's the tactical approach going forward?

As we noted in our initial reaction report, the conflict risk premium for gold is often short-lived, exhibiting a "buy the rumor, sell the fact" characteristic.

In addition, the initial sharp rebound of the US dollar, coupled with inflationary pressures from rising energy prices that pushed up interest rate expectations and weakened expectations of a Fed rate cut, continued to exert new pressure.

We believe there is another dynamic factor worth exploring – the contagion effect of widespread investor risk-taking during periods of rising stock market volatility, which could lead to outflows from gold ETFs and the sharp reversal in gold prices at the beginning of last week.

Figure 3: Cumulative Change in the Effective Federal Funds Rate Implied by OIS (Current vs. December 2025)

Figure 4: Comparison of the cumulative change of the US Dollar Index (DXY) and the OIS implied effective federal funds rate as of December 2026

Figure 5: Weekly Changes in Global Gold ETF Holdings

Figure 6: CBOE Volatility Index (VIX)

Gold is not immune to the "sell everything" shock.

When the VIX index is high and rising, gold is initially caught up in a "sell everything" trade.

From a tactical perspective, given that the longer the Strait of Hormuz closure disrupts energy flows and global supply chains, the higher the stock market volatility is likely to be, this initial contagion risk is an important structural dynamic for gold.

Generally speaking, during periods of market/stock market stress, this selling dynamic in gold stems from investors' need to increase portfolio liquidity and raise cash, coupled with margin call pressures, portfolio rebalancing, and value-at-risk (VaR) shocks, leading to overall derisking.

Data confirms this: filtering weekly gold returns across different VIX ranges reveals that when the VIX is above 30 and rising, gold faces greater resistance on average during periods of significant stock market contraction. In this range, the proportion of positive returns for gold drops to only 45%, with the average weekly return turning negative—the only group exhibiting this pattern.

In the silver market, this risk-averse contagion effect is even more pronounced. In a high and rising VIX environment, silver prices fall about 61% of the time, with an average weekly decline of over 2%. Similarly, a strengthening dollar may also play a role in this dynamic, as there is strong asymmetric buying in the DXY dollar index during periods of high and rising VIX.

Figure 7: Weekly Average and Median Returns of the S&P 500 Index by VIX Range

Figure 8: Weekly average and median returns divided by VIX range

Figure 9: Weekly average and median returns of silver divided by VIX range

Figure 10: Weekly Average and Median Returns of the US Dollar Index (DXY) by VIX Range

Besides the absolute level of VIX, the trend is equally crucial – in a high and declining VIX environment, gold will shift from the most bearish range to the most bullish range.

To examine this timeline in more detail, we analyzed 25 discrete cases of the VIX breaking out of this high range since 2006. In the vast majority of cases (except during the 2008 global financial crisis, 2011, and the 2020 COVID-19 pandemic), the VIX quickly fell back below 30 within 10-15 trading days.

Observing the average price trajectory of gold during these phases, typically, the most intense selling pressure occurs in the first few days after the VIX breaks through 30 (with an average cumulative decline of about 0.5%). From the third day onwards, a faster and more sustained rebound occurs, lasting an average of more than a week. During this rebound, gold typically recovers the pre-breakout level on the fourth day and achieves a gain of over 2% from the trough to the peak around the tenth trading day.

Figure 11: Average performance of gold during periods when the VIX breaks through 30

Silver followed a similar path, but due to its higher volatility, it experienced a larger initial drop (averaging -2.5%), and during rebounds, it typically only recovered to, rather than surpassed, the pre-breakout level. In the longer term, silver is also prone to double-bottom patterns, but these are steeper and more persistent than those of gold, particularly during the recessions of 2008 and 2020.

Figure 12: Average performance of silver during periods when the VIX index broke through 30.

Figure 13: Proportion of gold and silver prices above the level of the day before the VIX first reached or exceeded 30.

The higher and longer energy prices rise, the more likely the Federal Reserve's response function is to turn dovish.

Looking beyond short-term tactics, while rising oil prices and increasing inflation/cooling interest rate cut expectations may exacerbate some of the recent downward volatility in gold prices, we ultimately believe that gold will rise significantly in the scenario of a prolonged closure of the Strait of Hormuz.

First, there's inflation—although commodity indices track inflation more closely on a monthly basis, gold has been a relatively stable hedge during periods of rapid and sustained inflation, and this framework is even more applicable given the current inflation dynamics amid oil price risks.

Since 2000, the US CPI has seen five relatively sustained and significant increases exceeding 2.5 percentage points year-on-year. On four of these occasions (excluding the most recent surge in inflation following the COVID-19 pandemic), gold recorded double-digit gains. Especially in an environment where oil price shocks have evolved into stagflation, gold remains a key hedging tool.

Figure 14: Five periods of rapid and sustained rise in US inflation since 2000

Figure 15: During these periods, gold outperformed the Bloomberg Commodity Index (BCOM) most of the time, with the only exception being the inflationary shock following the COVID-19 pandemic.

Secondly, there's the Fed's reaction function—ahead of next week's meeting, our economists believed that a modest rise in oil prices (as we've already seen) would prompt the Fed to remain on the sidelines, but a larger and more sustained rise in oil prices would turn it dovish. The higher and more persistent the oil price increase, the greater the potential non-linear downward pressure on growth, and consequently, the greater the drag on employment.

While this would lead to a larger surge in overall inflation, the transmission to core inflation appears limited. Therefore, if oil prices surge to $120/barrel or higher due to continued actual and expected supply reductions, our economists expect the Federal Reserve to be inclined to dovish, as downside risks to economic activity become more apparent again.

IV. Conclusion

Although the de-risking process of the past two weeks has already impacted gold to some extent, it may still be affected by broader de-risking events in the short term, especially if the stock market suddenly prices in a major and persistent negative shock to the global economy, triggering liquidity concerns.

Furthermore, gold prices may face further near-term pressure as the interest rate market continues to rule out any remaining expectations of a Fed rate cut. While this potential for a further sharp decline warrants caution, we still believe the longer the disruption lasts, the greater the impact on inflation and even economic growth. We maintain that the outlook for gold will soon turn significantly bullish, a trend amplified by the Fed's rapid shift towards easing.

Spot gold fell 3.12%, while silver's decline widened to 15%.

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