Increased stress across industrial and base metals appeared to emerge suddenly toward the end of last week, seemingly undermining an investment case that has been building over the past six or seven months. Looked at more closely, however, the downward pressure on prices appears less like a reversal of opinion and more like a further expression of the same underlying unease that has been present for some time.
That unease reflects a broad set of economic concerns held across institutional investors, industrial participants, and retail markets. Not all of these concerns are shared uniformly, but there is a near-universal sense of uncertainty of some description. While such uncertainty is not unusual in markets, what feels different is the limited set of tools and products available to express, hedge, or mitigate it. As a result, positioning has become increasingly concentrated, amplifying the impact of even modest shifts in sentiment.
Concerns around the durability of the U.S. dollar as a reserve currency may at times be overstated, yet commentary from within the current administration has done little to fully dispel them. These sit alongside longer-standing anxieties around inflation, resource availability, and the fragility of just-in-time supply chains developed over the past three decades. The first clear appreciation of these vulnerabilities emerged during Covid, but more recently China’s response to U.S. tariff escalation has brought them back into sharper focus. Hard assets have increasingly become a focal point for these overlapping fears.
Base Metals: Liquidity, Balance Sheets, and Market Stress
Recent reports from China on the role played by state-owned enterprises in certain trading and financing arrangements, commonly referred to as circular trading, have highlighted how a portion of market liquidity was more balance-sheet dependent than end-demand driven. A single physical transaction could generate multiple layers of turnover as material was repeatedly bought and sold through affiliated counterparties, with invoice-based financing allowing credit to be monetised well ahead of final consumption. These structures are not new, nor inherently problematic during periods of stability and readily available credit. However, as volatility in wider markets increased, stress transmitted efficiently into this area of activity, exposing how reliant perceived liquidity had become on these flows as bid–ask spreads widened and risk tolerance diminished.
From a supervisory perspective, this has sharpened the focus on the quality and sustainability of revenue generated within SOE trading arms. Instructions from the State-Owned Assets Supervision and Administration Commission to review operations and reduce non-essential activity can reasonably be expected to result in a further withdrawal of balance-sheet intermediation, amplifying the sense of reduced liquidity and, in turn, lower risk tolerance among market participants.
Precious Metals: Financialised Demand and Behavioural Controls
A shift in dynamics in precious metals is also in evidence, with concerns relating less to institutional balance sheets and more to the accumulation of financialised demand, particularly through retail-facing products that allow gold and silver to function as deposit-like instruments during periods of heightened uncertainty. Rising macro anxiety has driven a commensurate increase in precious metals exposure, initially motivated by capital preservation, before evolving into a trade and then finally a crowded long expression.
While it remains too early to assess the aggregate impact on balance-sheet resilience or market confidence globally, the reaction by Chinese regulators and state-linked banks suggests a growing discomfort with the pace and concentration of these flows. Measures to tighten risk controls on exchanges and to moderate the expansion of gold and silver accumulation products are intended to cool one-way positioning and limit the build-up of financial leverage embedded within ostensibly conservative savings vehicles. As in base metals, these interventions do not remove the underlying metal from the system, but they do alter liquidity considerations. Comparable adjustments are more difficult to implement in Western markets, though corresponding steps have been taken through increases in initial margin requirements on CME precious metals contracts, effective from the close on February 2nd.
Interpretation and Implications
Taken together, these developments suggest that the fundamental concerns that have driven the rapid ascent of hard assets in recent months remain in place. That should not, however, be interpreted as an argument that near-term price rallies must follow. Markets rarely return to the scene of the crime immediately following mass liquidation events, particularly when underlying liquidity assumptions are still being reassessed.
Vertical take-offs may be desirable for SpaceX, but they are less appealing in asset markets, especially when elegant landings are far from guaranteed.
Overlaying an already nervous and tightly positioned market is the added uncertainty surrounding the nomination of Kevin Warsh as the next Federal Reserve governor. He has been alternately framed as hawkish and as an advocate of rate cuts driven by AI-led disinflation. The contradiction itself is revealing. While it reinforces the longer-term case for metals linked to data centres and electrification, it does little to reduce near-term volatility. China’s recent actions suggest a preference for managing where that volatility manifests rather than allowing it to build unchecked. In that context, the case for broader diversification and a more measured approach to scaling into positions appears increasingly important.
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