Copper: AI Hype or Supply Squeeze?

Gold Market Positioning and Outlook

• Client optimism and upside structures (calls, call spreads, binaries) deployed in January have largely been unwound as the Iran conflict challenged the bullish thesis.
• Current market positioning has reverted to levels seen in Q3 of the previous year, removing much of the early-year euphoria.
• While a price target of $6,000 by year-end is possible given the rally's velocity, the trader remains skeptical of this outcome in the near term.
• Skepticism regarding new highs stems from a shift in macro drivers: the market now expects higher nominal and real rates due to persistent inflationary pressures from energy, food, and military buildup.
• The Iran conflict has disrupted oil revenue, reducing the dollar recycling capacity of Middle Eastern nations that previously supported gold prices.

Gold's Role as a Safe Haven

• Despite a $40–$50 billion net liquidation of institutional positions and significant volatility during the peak of the U.S.-Iran conflict, gold has remained resilient near $4,400.
• Gold has outperformed peer safe-haven assets, such as treasuries and sovereign bonds, which struggled during the same period.
• The asset successfully performed its traditional function by absorbing large-scale position liquidations while maintaining price support.

Silver Market Dynamics

• The initial silver rally was driven by a confluence of tariff fears on U.S. silver, Indian and Chinese retail buying, and a physical squeeze as stocks in London hit lows.
• Extreme volatility led to forced deleveraging, with triple and double-levered silver ETFs becoming forced sellers during sharp declines.
• Current forward path is tightly correlated with gold; significant outperformance is unlikely if gold struggles to break new highs.
• The trader does not expect silver prices to exceed $100 this year due to the withdrawal of speculative euphoria.

Copper: AI Demand vs. Fundamentals

• Recent price action is driven by a mix of AI data center demand (acting as a proxy trade) and anticipated U.S. tariffs on copper, similar to aluminum and steel measures expected by late June.
• A massive migration of physical copper from the East to the U.S. is building inventories, tightening the non-U.S. market while creating a local surplus in the U.S.
• Bullish arguments posit that deficits are inevitable due to real AI demand and future tariffs, requiring material price appreciation in one to two years.
• Current inventory levels are at five-year highs, and the market remains in a global surplus, contradicting the immediate shortage thesis.
• The trader holds a neutral stance on copper for the next three to six months, waiting for U.S. tariff policy clarity before taking a directional view.
• Previous failures to implement tariff expectations have led to price drops of over 10%, highlighting the risk of short-term mark-to-market volatility.

Aluminum Market Inflection

• The Middle East conflict has disrupted smelters in the region, creating an immediate physical deficit expected to tighten markets heading into summer.
• Smelter restarts are unlikely before the end of the year at the earliest, with some estimates pushing recovery to 12 months out.
• Prices are projected to grind higher, potentially testing $4,000 (an approximate 10% increase from current levels).
• A massive supply influx from Indonesia and the eventual reopening of Middle Eastern smelters (Q4 2024 to H1 2025) is expected to swing the market rapidly into a surplus.
• Current steep backwardation in time spreads is expected to revert to a carry market once the surplus returns.