Editor’s Note
This analysis highlights the dramatic volatility in metals markets following the Lunar New Year, noting that January’s gains alone surpassed the entirety of the previous year’s performance. The piece underscores the exceptional surges in both precious and non-ferrous metals, setting the stage for a discussion on the sustainability of this bullish trend.
◾ After a strong start post-Lunar New Year, metals experienced extreme volatility at the end of January, with an epic surge followed by an epic correction.
The Nanhua Composite Index rose 8.6% in January, once reaching as high as 11.4%. The gains in January alone exceeded those of the entire previous year. The most eye-catching performers were undoubtedly metals, with precious metals and non-ferrous metals recording maximum gains of 47.1% and 13.6%, respectively.
Compared to last year, this year’s bullish sentiment even spread to energy/chemical and ferrous sectors, which were bearish last year. They both recorded gains in January, with single-day increases once reaching 1.6% and 3.6%.
However, the accelerating rally came to an abrupt halt at the end of January. Precious metals saw their largest historical decline, with silver falling as much as 36% intraday, and domestic non-ferrous metal contracts hitting limit-down.
The sharp rise in metals after the holiday was a resonance between contingent events and “grand narratives.” Precious metals advanced as if unopposed, while non-ferrous metals saw successive gains, with many minor metals hitting limit-up.
Following last year’s metal bull market, long-term narratives such as monetization and cyclical reversal gradually gained traction.
Precious metals are driven by monetization attributes; non-ferrous metals are driven by the conflict between technological demand and supply rigidity, amplified by resource nationalism and strategic stockpiling.
After the holiday, three factors resonated to catalyze the move:
Geopolitical event premiums from Venezuela and Iran at the beginning of the month; the US-Europe Greenland dispute and expectations of European “de-dollarization” in mid-month; and the “US dollar credit crisis” triggered by Trump’s “manipulation of the dollar” in late month.
For non-ferrous metals, the strategic attributes exposed by geopolitical disputes and optimistic sentiment in the equity market drove prices higher.
In this process, silver, possessing both monetary and industrial attributes, coupled with last year’s short squeeze narrative, became the star of this metal rally.
However, the metal rally came to an abrupt halt around January 30, which the market attributed to negative news about the new Fed nominee.
On January 29, precious metals surged to new highs before retreating to close lower, forming a “high-wave” candlestick pattern. Subsequently, on January 30, precious metals experienced their largest historical decline, and non-ferrous metals saw their biggest drop of the year.
The reason the market found for the decline was the hawkish new Fed nominee, raising concerns about a “Fed pivot.”
On January 30, Trump formally nominated Warsh as the new Fed nominee. Warsh is seen as a representative of the hawkish camp due to his past interviews criticizing the Fed’s quantitative easing policies and his hawkish stance.
On January 16, after Trump stated in an interview that he would not nominate Hassett, the market considered Warsh the hottest candidate for the new Fed chair. Gold fell by $60 intraday but rebounded sharply the same day, lasting less than a day before resuming its rise the next trading session.
The deeper reason lies in the crowding of narratives and the reflexivity of leverage, with silver being the most extreme case, dragging down other commodities.
While grand narratives and short-term factors resonated to push prices higher, the market may have overlooked that the foundation of these narratives and prices was being eroded. Once the foundation shook, the excessively crowded narratives, under the effect of leverage, led to a “stampede” as funds exited.
If silver was previously the undisputed star due to its dual monetary and industrial metal attributes, in the risks of the post-holiday rally, it also became the “eye of the storm” for all asset prices.
First, while silver prices kept hitting new highs, ETF funds were continuously flowing out. As silver prices reached new highs, the holdings of the world’s largest silver ETF (SLV) had decreased by 6.5% compared to last year’s peak holdings.
Second, regulators imposed increasingly stringent “deleveraging” measures. Since late last year, exchanges have continuously increased restrictions on silver products to “reduce leverage.” Just considering the period after the holiday, the CME raised margins four times; the SHFE issued 11 consecutive notices, raising margins, limiting positions, and even restricting withdrawals.
Third, the short squeeze narrative had already reversed. Silver lease rates reflect that market expectations for further silver price increases are not strong. In October last year, the 1-month silver lease rate once reached 35%; in December, it was still as high as 8.5%. Since mid-to-late January, the silver lease rate has fallen below 3%, hitting a low of 0.6% on January 28. In other words, expectations for further silver price increases are not strong.
Returning to January 31, the exit of long funds (long liquidation) triggered limit-down in the domestic silver main contract. The contraction in risk appetite triggered a liquidity-crisis-like situation, eventually spreading to gold, copper, and other non-ferrous metals.
Amid high macro volatility, the market seems addicted to various grand narratives. While long-term trends like “de-dollarization” and “cyclical reversal” are undeniable, the “culprit” of this price decline is precisely the crowding of these narratives. The risk for asset prices lies in using short-term prices to excessively trade long-term stories.
After the extreme reversal, the narrative began swinging to another extreme. Market interpretations often “scapegoat” the new nominee, implying a “Fed pivot,” but this narrative does not hold.
The market overly focuses on his hawkish stance from two years ago but easily overlooks his “insider” status—Warsh’s father-in-law is Trump’s 60-year close friend, and Trump has a strong inclination to cut rates. The market also ignores his emphasis in interviews on the need for monetary policy “predictability.” The reality may be less hawkish.
The “commodity rotation” narrative heavily promoted by the market in the previous bull environment is also worth scrutinizing.
The recent commodity bull market also sparked market interest in exploring “commodity rotation,” including the supposed transmission from “precious metals -> metals -> energy/chemicals -> agricultural products.”
However, comparing commodity performance during the US stagflation of the 1970s, this transmission does not hold. The stagflation then came from imported “oil crisis” transmission; energy/chemicals moved in sync with or even ahead of precious metals. During the second oil crisis in the 1980s, after Volcker’s aggressive rate hikes, industrial metal prices could not be transmitted down. Price increases for some agricultural products, like sugar, mainly came from supply-side events, not transmission from fertilizers or labor.
The biggest significance of this sharp decline is “squeezing out the water.” It is recommended to focus on low-crowdedness commodities like copper.
After passive “deleveraging,” prices of various commodities return to their valuation essence. The core of “monetization” remains gold. Among industrial metals, the first to stabilize are still those with solid fundamentals, like copper.
As of February 3, except for precious metals, which still have a 20% recovery space from their price highs, industrial products overall have recovered to 97% of their peak prices. Among metals, the recovery speed is copper > gold > silver. Copper has recovered to 96% of its peak price, while silver is only at 74%.
In the short term, focus on strong non-ferrous metal varieties and Chinese commodities pushed higher by safe-haven funds.
The supply-demand gap for non-ferrous metals is difficult to ease, and crowding is not high, leading to strong price resilience. Watch key support levels for SHFE copper around 100,000 yuan/ton and 96,000 yuan/ton. After the recent restart of property market expectations, property chain commodities and assets have seen strong rebounds with high fund attention, but they should only be considered for short-term trading.
Domestic economy exceeding expectations, overseas geopolitical changes exceeding expectations, central bank monetary policy exceeding expectations.
