In Brief
- The price relationship between metals and energy appears to have changed, with demand-supply dynamics having moved in favor of most metal prices, but differently for energy.
- Gold demand rose on both long-term accumulation and short-term speculation, and industrial use has lifted silver and copper demand.
- A modest commodity allocation may add diversification, but investors should be mindful of its lack of income and the high level of volatility that could heighten portfolio risk. Instead, allocations to alternatives with historically low correlations to stocks and bonds may be considered.
In modern industrial economies, energy and metals prices typically move in sync, rising and falling with periods of global expansion and contraction. Recently, that relationship appears to be changing.
Precious and industrial metals have been climbing, while energy prices face downward pressure.
Analysts have dubbed this the “crocodile cycle”: picture a crocodile flashing its teeth, the top set representing metals (moving higher) and the bottom set representing energy (resetting lower) (Exhibit 1).
However, last week saw some reversal, with crude oil prices up 7.1%, while gold and silver plummeted 11.4% and 31.4%, respectively, on Friday. Whether this divergence proves durable will depend on how several structural forces play out.
Metals: constrained supply, steady demand
Metals have inelastic supply: suppliers cannot quickly produce more metal when prices rise. Developing new capacity is slow, costly, and a risky bet for miners. Meanwhile, demand has found new drivers. And when supply can’t respond and demand holds steady or grows, prices rise, which is what we have been seeing lately.
For gold, after rising by 67% in 2025, gold prices increased by another 8% year-to-date while setting new highs along the way (Exhibit 2). The demand-supply dynamics continue to keep gold prices relatively resilient: supply has been constrained as global production has not increased substantially in the past decade. Since 2010, annual gold supply has only increased by 16% to 5,002 tonnes1 in 2025, while demand from a variety of sources has increased. Structurally, central banks have been accumulating gold as part of a broader diversification of their reserves, and private investors have also started adding gold to long-term allocations as an alternative to bonds in hedging equity and inflation risk.
More recently, retail investors have flocked to hard assets amidst elevated geopolitical uncertainties. In addition, speculation about price momentum has led both retail and institutional investors to contribute further to short-term demand for gold. Further, emerging market households’ physical gold jewelry holdings remain on the rise. This combination of shorter-term and longer-term demand has stacked up against the constrained supply, as reflected in the rise in gold prices.
Silver is up 14% year to date and has extended its remarkable 2025 rally, during which prices surged past the USD 110 per ounce mark earlier last month. Copper prices also breached USD 13,000 per metric ton, marking an all-time high. Years of low production levels, stemming from a combination of declining ore grades, underinvestment, permitting delays and labor issues, have similarly led to supply bottlenecks in meeting demand, with silver still in 11% deficit (or 118 million ounces)2 of total supply and copper in less than a 1% surplus (or 225 kilo-tonnes)3 in 2025.
However, demand factors are vastly different. Industrial use, notably in the energy transition (solar for silver, electricity grids for copper), has been a structural addition to demand, while renewed artificial intelligence (AI) upcycle has also boosted a need for copper in building out AI datacenters, power generations, and electricity grids. Although silver was also susceptible to geopolitical speculation by retail investors in broadening from gold to other cheaper precious metals, silver’s much shallower markets and thinner inventories likely exacerbated its price outperformance in a trading squeeze as ETF inflows into silver over the past year accounted for only approximately 10% of those into gold.
Indeed, metals can be inherently volatile as an investment, and the demand-supply balance can change without warning. A meaningful slowdown in global growth, a reversal in central bank buying, or a faster-than-expected supply response could shift the equilibrium.
Energy: supply outpacing demand
Crude oil is a contrasting story. Global production capacity has expanded substantially to 108 million barrels per day (5% above global demand)4 and technological advancements have unlocked new sources of crude oil and gas, which have transformed the United States from an importer of energy to a major exporter.
While renewables like solar are a growing part of the energy mix, importantly, this is not a story of weakening demand for crude oil. Despite a shift towards renewables, petroleum consumption for now continues to trend upwards. The issue is simply that supply has grown faster than demand.
Energy markets have a long history of confounding expectations. Major supply disruptions from geopolitical events are not only possible, but probable, and could quickly tighten markets. For example, the risk of a possible U.S. strike on Iran raised the geopolitical premium of crude oil prices. Although Iran has indicated it could be ready for dialogue, ever since June last year, market participants have remained very sensitive to geopolitical headlines.
Investment implications
A modest allocation to commodities can serve as a hedge against monetary, geopolitical and systematic risks. It can also help offer diversification benefits, potentially lowering the risk of an overall portfolio while boosting overall risk-adjusted returns.
However, investors should be mindful that they could be trading one set of risks for another: a supply-demand outlook that can shift quickly, higher volatility, and an asset class that lacks predictability. The crocodile’s jaw could snap shut without warning.
In portfolio construction, supply-side shocks should not be overlooked. Commodities—especially energy—can help cushion inflation spikes from such shocks, as seen in 2022 during the Russia–Ukraine conflict. However, commodities typically do not generate income, which removes an important buffer and can raise portfolio volatility.
In particular, the volatility of gold is relatively high (higher than that of fixed income). Also, a lack of consistent negative correlation with risk assets such as equities means that gold does not really fulfill the criteria to be an effective hedge against risk assets.
It is reasonable to argue for a place in portfolio construction for commodities like gold. Yet, this should be from the angle of diversification for a well-calibrated strategic allocation and supportive fundamentals as mentioned above, rather than treating it as a protection against market volatility.
Last Friday’s correction especially serves as a reminder of the volatility of precious metals, with gold and silver both recording their worst session in decades.
When the outlook is uncertain, it can be helpful to “diversify the diversifiers.” Investors might also consider allocations to alternatives such as private infrastructure or real estate, which have had historically low correlations to stocks, bonds, and commodities.
1Source: World Gold Council.
2Source: The Silver Institute.
3Source: Wood Mackenzie.
4U.S. Energy Information Administration.