Deveya Gaglani from Axis Direct says gold should form the largest part of a five-year commodity portfolio. He explained that October saw a sharp divergence between gold, crude oil, and copper. Investors must understand these unique drivers instead of blindly buying the dip or chasing a very sharp rally.

Synopsis

In this edition of ETMarkets Commodity Talk, Deveya Gaglani, Senior Research Analyst – Commodities at Axis Direct, shares his views on the evolving commodity landscape and the role of gold, silver and industrial metals in a diversified portfolio. He also explains why gold could form the largest component of a long-term commodity allocation, while highlighting the risks of blindly buying the dip or chasing a sharp rally.

Building a long-term portfolio is about more than choosing between equities and bonds. Commodities, too, can play a role in diversification—but the sharp divergence in gold, crude oil and copper in recent months shows why investors need to understand the unique drivers behind each asset.

With gold facing pressure from a strong dollar and elevated interest rates, crude oil supported by geopolitical risks, and copper navigating volatility around AI and industrial demand, how should investors approach commodities over a five-year horizon?

Q) October has been a month of sharp divergence across commodities. What has been the biggest driver behind the contrasting moves in gold, crude oil and copper?

A) The primary driver behind the sharp divergence in October is the clash between broad macroeconomic headwinds (rising interest rates and a strong dollar) and isolated supply-demand shocks, driven by geopolitics and tech-sector volatility.

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Here is how these contrasting drivers played out across the three commodities:

Gold (Macro Headwinds): Prices faced significant pressure as markets priced in "higher for longer" interest rates—an expectation largely fueled by oil-driven inflation. This led to a surge in bond yields and the US Dollar Index, which dampened the safe-haven appeal of non-yielding precious metals.

Crude Oil (Geopolitical Premium): Oil rallied against the broader macro trend due to persistent supply-side risks. Drone attacks on oil infrastructure and tankers, combined with ongoing geopolitical tensions involving Iran, the US, Russia, and Ukraine, maintained a strong risk premium that kept prices elevated.

Copper (Sector-Specific Volatility): Copper experienced a split month driven by tech-sector dynamics. Prices rallied in the first half of October on strong demand prospects linked to AI investments, data centre buildouts, and low inventories. However, prices corrected sharply as AI-related equities tumbled and copper inventories began to recover, triggering heavy profit-booking.

Q) Gold has fallen below the $4,000-an-ounce mark, while crude has rallied sharply. Is this primarily an inflation story, a geopolitical story or a shift in investor positioning?

A) It’s a combination of an inflation and geopolitical story, as the recent price correction has been driven primarily by elevated inflation and expectations that the Federal Reserve may maintain a hawkish stance into next year if oil prices fail to cool down.

Q) Copper has weakened despite its long-term role in electrification and infrastructure. Is the recent correction a buying opportunity or a warning that global industrial demand is slowing?

A) The market had anticipated the implementation of tariffs on refined copper as well, but this did not materialise. Meanwhile, high interest rates and concerns that they could slow economic activity contributed to the price correction from higher levels.

However, copper’s demand outlook remains strong, supported by its critical role in electrification, data centres and electric vehicles (EVs), which could drive prices higher. Additionally, supply deficits, exacerbated by mine closures across multiple regions, are likely to keep the market tight and support prices over the longer term.

Q) How do higher interest rates typically affect gold, crude oil and copper differently? Why shouldn't investors treat all three commodities as one asset class?

A) The nature and use cases of each commodity differ significantly. Crude oil and copper prices generally move in tandem, as rising economic activity and GDP growth tend to increase demand for both commodities.

Gold, on the other hand, is considered a safe-haven asset and is widely used in jewellery, with a significant share of demand coming from India and China.

Over the past two to three years, gold has also gained traction as an investment asset, with ETF inflows surging multifold. While a high-interest-rate environment is generally considered unfavourable for the broader commodities market, supply-side concerns have supported crude oil and copper prices, whereas gold prices have corrected sharply.

Q) If the Fed holds rates in October but signals tighter policy ahead, could gold remain under pressure even without an immediate rate hike?

A) The Fed kept interest rates unchanged, as expected, at its October FOMC meeting. However, it refrained from providing clear forward guidance, indicating that future policy decisions will remain data-dependent.

Given the current high-inflation environment, we expect gold prices to remain under pressure in the near term, as long as the $4,260 level holds as resistance.

Q) Gold has corrected sharply in October after a strong run. What would convince you that this is a healthy correction rather than the beginning of a prolonged downtrend?

A) A Pause in Fed Rate Hikes: The market has already fully priced in the expected interest rate hike for Dec’26. If the Federal Reserve provides forward guidance indicating no further rate hikes in 2027, it would remove a major macroeconomic headwind and clear the path for gold to resume its rally.

Holding Critical Support Levels: On the technical front, the $3,900 mark serves as a strong structural support zone. As long as gold defends and maintains this level, the long-term bullish thesis remains completely valid, framing the October decline as a standard technical correction.

Q) Should retail investors consider commodities as a separate allocation within a diversified portfolio, or should most investors stick to equities, bonds and gold?

A) The traditional approach remains a preferred strategy for portfolio diversification, with investors advised to maintain a balanced allocation across equities, bonds and gold.

Q) What are the biggest mistakes retail investors make when entering commodities after a sharp rally or buying a dip during a correction?

A) Blindly Buying the Dip (The "Value Trap"): Investors often buy a sharp price correction hoping for a quick, short-term bounce without understanding why the commodity dropped in the first place. If the fundamental drivers have shifted, they can end up stuck holding a losing position for years.

Chasing the Rally (FOMO): Buying in after a massive run-up usually means entering when the risk-to-reward ratio is at its worst, leaving investors exposed to sudden profit-booking corrections.

Q) Finally, if an investor is building a portfolio for the next five years, what role would you assign to gold, silver and industrial commodities—and what would you avoid?

A) When constructing a portfolio, consider allocating 15%–20% of the overall investment to commodities. Within this allocation, gold could form the largest component, given its role as a safe-haven asset, while silver and copper can provide additional diversification and exposure to industrial demand.

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