Commodity markets have lost momentum over the past few weeks. Gold, silver and copper have all come under pressure, while oil has surrendered much of the rally sparked by tensions in the Middle East. Although each market has its own story, they're all responding to the same macro force, a stronger USDOLLAR.

The dollar has strengthened as investors have become increasingly convinced that the Federal Reserve is not finished fighting inflation. Sticky price pressures and a resilient US economy have reinforced expectations that interest rates could stay higher for longer, with markets now attaching a meaningful probability to another rate hike later this year. A hawkish Fed has pushed the greenback higher against most major currencies.

That matters because most commodities are priced in US dollars. When the dollar rises, overseas buyers need more of their local currency to buy the same barrel of oil or ounce of gold. Demand naturally softens, making life harder for commodity prices across the board.

Gold And Silver Have Seemingly Lost the Safe-Haven Battle

Gold is normally one of the first places investors turn when uncertainty rises. The problem today is that it is competing with another safe haven, the USDOLLAR.

A hawkish Federal Reserve tends to lift both the dollar and US Treasury yields. For investors, that changes the calculation. Instead of owning an asset that pays no income, they can earn an attractive yield from government bonds while still remaining in what is widely regarded as one of the safest markets in the world.

That's the opportunity-cost story. Gold doesn't pay interest, so every increase in bond yields raises the cost of holding bullion instead of an income-producing asset. Add a stronger dollar into the mix and precious metals face a double headwind.

Of course, that can change quickly. If inflation manages to ease, pressure on the Federal Reserve to tighten policy further should lessen. Lower interest-rate expectations would likely weigh on the dollar, ease bond yields and remove two of the biggest obstacles facing gold.

Silver has been caught in the same downdraft. Like gold, it suffers when the dollar strengthens and yields rise. Unlike gold, though, it also depends heavily on industrial demand, making it even more sensitive to the outlook for global growth.

Copper Has Weakened but There Is Opportunity

Copper's story is a little different. Nicknamed "Dr Copper" because of its reputation for diagnosing the health of the global economy, the metal is closely linked to manufacturing, construction and industrial activity. Concerns over slower global growth and China's sluggish property sector have therefore weighed on prices.
Yet the long-term picture remains encouraging.

Artificial intelligence isn't consuming copper directly, but the infrastructure behind AI certainly is. Every new data centre requires enormous amounts of electricity, and that means more transmission lines, substations, transformers and cooling systems, all of which are copper intensive. AI infrastructure is effectively creating another structural source of demand on top of existing themes such as electric vehicles, renewable energy and power-grid expansion.

The recent pullback in AI-related stocks has cooled enthusiasm across parts of the supply chain, including copper. But if investment in AI infrastructure accelerates again, copper should be one of the biggest beneficiaries.

Oil's Conflict Premium Has Evaporated

Oil has followed a very different path. When tensions in the Middle East escalated, traders quickly priced in the possibility that shipping through the Strait of Hormuz could be disrupted. Given that around a fifth of global oil consumption normally passes through the Strait, the prospect of any interruption was enough to push crude prices sharply higher. That fear has faded.

Shipping has largely resumed, confidence has improved and the market is becoming increasingly comfortable that oil continues to flow through one of the world's most important energy corridors. As the perceived supply risk has diminished, so too has the conflict premium embedded in crude prices.

Attention is now shifting back to the fundamentals - global demand, inventories and production. If economic growth continues to soften while supply normalises, oil prices could struggle to hold recent levels.

Final Thought

For much of this year, commodities have been driven by geopolitics. Today, the market's attention has swung back to macroeconomics. A stronger dollar and the prospect of higher US interest rates are weighing on much of the commodity complex, while easing tensions in the Middle East have removed a sizeable risk premium from oil. The short-term picture may be challenging, but the longer-term investment themes haven't disappeared. Electrification, AI infrastructure and the ongoing expansion of global power networks continue to point towards strong structural demand for industrial metals. Once the macro headwinds begin to ease, those themes are likely to come back into focus.