Risk Management
Comprehensive frameworks for managing volatility, position sizing, and portfolio protection in metal markets
Why Risk Management is Critical in 2026
Metal volatility 30-50% above 2010s baseline. Gold daily moves of $50-100, silver $3-8, copper $500/tonne now common.
Geopolitical disruptions (Russia sanctions, China export quotas) creating sudden 10-30% price moves within days.
CME's new percentage-based margins mean margin calls can spike 50-100% overnight during volatility events.
The Risk Triangle Framework
All metal trading risks fall into three interconnected categories. Effective risk management requires addressing all three simultaneously.
Market Risk
Adverse price movements, volatility spikes, trend reversals
Key Components:
- • Price risk: Long gold from $4,600 → $4,200 = 8.7% loss
- • Volatility risk: Options premium collapse, stop-outs
- • Correlation breakdown: Gold/silver ratio moves from 52 to 70
- • Gap risk: Weekend/overnight price jumps (common in PGMs)
Mitigation Strategies:
- ✓ Stop-loss orders (2-5% below entry)
- ✓ Position sizing (1-3% account risk per trade)
- ✓ Diversification across metals
- ✓ Hedging with options or inverse positions
Credit Risk
Counterparty default, broker insolvency, margin calls
Key Components:
- • Broker risk: Broker bankruptcy (e.g., MF Global 2011)
- • Exchange risk: LME nickel suspension 2022 precedent
- • OTC counterparty: Physical dealer fails to deliver
- • Margin call risk: Insufficient funds to meet requirements
Mitigation Strategies:
- ✓ Use regulated brokers (NFA, FCA registered)
- ✓ Verify segregated accounts (CFTC rules)
- ✓ Maintain 50% margin buffer (avoid max leverage)
- ✓ Diversify across brokers for large positions
- ✓ Buy allocated physical (vs. unallocated/pooled)
Liquidity Risk
Inability to enter/exit positions at desired prices
Key Components:
- • Bid-ask spreads: $0.50 on gold widens to $5 in crisis
- • Market depth: Large orders move price (PGMs especially)
- • Flash crashes: May 2010 gold flash crash (9% in 2 minutes)
- • Physical premium spikes: Paper gold at $4,620, coins $4,900
Mitigation Strategies:
- ✓ Trade liquid contracts (GC, SI, HG not PL, PA)
- ✓ Avoid illiquid hours (Asian session for COMEX)
- ✓ Use limit orders (not market orders) in thin markets
- ✓ Scale into/out of large positions over days
- ✓ ETFs for quick exit (vs. physical with 3-7 day settlement)
Risk Triangle Interconnections
The three risk categories amplify each other during market stress:
Scenario: Geopolitical Crisis
Market risk: Gold spikes $200 → Liquidity risk: Spreads widen 10x → Credit risk: Margin calls force liquidations → Market risk: More selling pressure (vicious cycle)
Scenario: Broker Failure
Credit risk: Broker freezes accounts → Liquidity risk: Can't close positions → Market risk: Exposed to adverse moves with no recourse
Scenario: Flash Crash
Liquidity risk: No bids in market → Market risk: Stop-losses execute at terrible prices → Credit risk: Margin insufficient after slippage losses
Position Sizing for Volatile Commodities
Proper position sizing is the single most important risk control. It determines whether a losing streak wipes you out or represents a manageable drawdown.
Fixed Percentage Risk Model
Risk only 1-3% of account equity per trade. This ensures survival through inevitable losing streaks.
Example Calculation:
- Account size: $50,000
- Risk per trade: 2% = $1,000
- Entry: Gold futures at $4,600
- Stop-loss: $4,550 (50 points = $5,000 per contract)
- Position size: $1,000 ÷ $5,000 = 0.2 contracts (use mini: 2 MGC)
Risk Levels by Experience:
- • Beginner (1% risk): Can withstand 70+ consecutive losses before account halved
- • Intermediate (2% risk): 35 consecutive losses to halve account
- • Advanced (3% risk): 23 consecutive losses to halve account
- • Reckless (10%+ risk): 7 losses = -50% account (unrecoverable)
Volatility-Adjusted Sizing
Reduce position size when volatility spikes to maintain consistent risk.
2026 Volatility Framework:
- • Normal volatility (VIX < 20, gold IV < 15%): Standard 2% risk
- • Elevated (VIX 20-30, gold IV 15-25%): Reduce to 1.5% risk
- • High (VIX 30-40, gold IV 25-35%): Reduce to 1% risk
- • Extreme (VIX > 40, gold IV > 35%): 0.5% risk or sit out
Metal-Specific Volatility (2026 baseline):
- • Gold: 12-15% annual volatility (low) → Standard sizing OK
- • Silver: 30-35% volatility (2x gold) → Halve position size
- • Copper: 25-30% (supply shocks) → Reduce 25%
- • Palladium: 40-50% (extreme) → Quarter standard size
- • Lithium: 60-80% (wild swings) → Minimum position or avoid
Maximum Portfolio Heat Rules
Total at-risk capital across ALL positions should never exceed certain limits:
Conservative
Max 5% total portfolio heat
2-3 positions at 1-2% each
Moderate
Max 10% total portfolio heat
3-5 positions at 2% each
Aggressive
Max 15% total portfolio heat
5-7 positions at 2-3% each
Reckless
>20% total portfolio heat
Extremely high ruin probability
Portfolio Allocation Guidelines
Strategic asset allocation for metal exposure within a diversified portfolio. Industry standard: 5-10% precious metals, up to 5% additional for industrial/rare earths.
Conservative Allocation
Risk tolerance: Low | Time horizon: 10+ years | Goal: Wealth preservation
Moderate Allocation
Risk tolerance: Medium | Time horizon: 5-10 years | Goal: Growth + inflation hedge
Aggressive Allocation
Risk tolerance: High | Time horizon: 2-5 years | Goal: Maximum growth
Rebalancing Discipline
Quarterly Rebalancing (Recommended)
- • Review allocation every 90 days
- • If any category exceeds target by >25%, trim to original percentage
- • Example: Silver up 50%, now 3% (target 2%) → Sell 33% to restore balance
- • Forces "buy low, sell high" discipline automatically
Threshold Rebalancing
- • Rebalance whenever total metal allocation deviates >3% from target
- • Example: 10% target, now 13.5% → Trim to 10%
- • Or: 10% target, now 6.5% → Add to restore 10%
- • More responsive in volatile markets (2026 environment)
Stop-Loss & Volatility Management
Stop-Loss Strategies
1. Fixed Percentage Stops
Exit when position down X% from entry. Simple but ignores market structure.
- • Gold: 2-3% stop ($92-138 on $4,620 entry)
- • Silver: 5-7% stop ($4.40-6.16 on $88 entry)
- • Copper: 4-6% stop
- Best for beginners - clear and objective
2. Technical Stops
Place below key support levels. Respects market structure.
- • Recent swing low minus buffer ($4,580 if prior low $4,600)
- • Below key moving average (50-day or 200-day)
- • Fibonacci retracement levels (61.8% common)
- Requires chart analysis skills
3. ATR-Based Stops
Volatility-adjusted stops using Average True Range.
- • Formula: Entry - (2 × ATR)
- • Example: Gold ATR = $30 → Stop at $4,560 ($4,620 - $60)
- • Automatically widens in volatile periods
- Best practice for active traders
4. Time-Based Stops
Exit if trade doesn't work within timeframe.
- • Day trades: Close all positions before market close
- • Swing trades: Exit if no progress in 5-10 days
- • Prevents capital being tied up in dead positions
2026 Volatility Considerations
30-50% Higher Volatility
What this means for your stops:
- • Old (2020): Gold 2% stop = $34 (price $1,700)
- • New (2026): Gold 2% stop = $92 (price $4,620)
- ⚠ Price noise now 2-3x larger in dollar terms
- ⚠ May need wider stops (2.5-3.5%) to avoid stop hunts
- ⚠ OR reduce position size to maintain same dollar risk
Managing Overnight/Weekend Gaps
2026 geopolitical risks create frequent price gaps:
- 1. Reduce position size by 30-50% if holding through weekend
- 2. Use options for tail risk protection (cheap OTM puts)
- 3. Monitor news flow - close before major events (FOMC, elections)
- 4. Consider guaranteed stops (CFDs) despite higher cost
Dynamic Stop Management
Adjust stops as trade moves in your favor:
- • Trailing stops: Move stop up as price rises (trail by 1-2 ATR)
- • Breakeven stops: Move to entry price once up 1.5-2x initial risk
- • Profit protection: Lock in 50% of gains when up 3x initial risk
- Never move stop further from entry (only toward profit)
When NOT to Use Stops
Long-term physical holdings:
- • Physical gold/silver for wealth preservation (10+ year horizon)
- • Core strategic allocation (5-10% portfolio)
- • Buying dips with dollar-cost averaging instead
- Selling physical incurs high premiums/spreads - not for tactical trading
Stop-Loss Execution Tips
Order Type Selection
- • Stop-market: Guaranteed execution, price not guaranteed
- • Stop-limit: Price protected but may not execute
- ✓ Recommendation: Stop-market for liquid metals (gold, silver)
- ✓ Stop-limit for illiquid (PGMs) with 1-2% buffer
Avoid Obvious Levels
- • Don't place at round numbers ($4,600, $90, $10,000)
- • Offset by $5-15 ($4,587, $89.20, $9,975)
- • Market makers hunt stops at obvious levels
- ⚠ "Stop raids" common before reversals
Mental Stops
- ✗ Never rely on "mental stops" - you won't honor them
- ✗ Emotions override logic when money is at stake
- ✓ Always enter stop order immediately upon entry
- ✓ Use broker's guaranteed stops if available (small fee worth it)
Metal Correlation Analysis
Understanding correlations prevents false diversification and reveals hedging opportunities. Correlations change during market stress.
Normal Market Correlations (2026)
Strong positive correlation. Silver amplifies gold moves (2-3x beta).
Strong negative correlation. Weak dollar = higher gold prices.
Very strong. Copper is economic indicator ("PhD in Economics").
Moderate positive. Both PGMs, but different end-uses cause divergence.
Near-perfect correlation. Lithium demand 90% batteries.
Correlation Breakdown (Crisis Mode)
During Market Panic:
- • All correlations → +1.0: Everything sells off together (liquidity crunch)
- • Gold/silver correlation strengthens to +0.95
- • Industrial metals crash together regardless of fundamentals
- • Even gold/USD negative correlation weakens (flight to USD cash)
- Diversification fails exactly when you need it most
Correlation Matrix (2026 YTD)
| Au | Ag | Cu | Pd | Li | |
|---|---|---|---|---|---|
| Gold | 1.0 | 0.75 | 0.22 | 0.15 | -0.05 |
| Silver | 0.75 | 1.0 | 0.45 | 0.32 | 0.18 |
| Copper | 0.22 | 0.45 | 1.0 | 0.51 | 0.62 |
| Palladium | 0.15 | 0.32 | 0.51 | 1.0 | 0.38 |
| Lithium | -0.05 | 0.18 | 0.62 | 0.38 | 1.0 |
+1.0 = perfect positive | 0 = no correlation | -1.0 = perfect negative
Using Correlations for Risk Management
True Diversification
- • Avoid: Long gold + long silver (0.75 correlation = redundant)
- ✓ Better: Long gold + long copper (0.22 correlation)
- ✓ Best: Long gold + short USD (inverse correlation hedge)
Hedging Strategies
- • Long copper, worried about demand shock? Short silver (0.45 corr)
- • Long gold as USD hedge? Add inverse USD ETF (UDN) to amplify
- • Long lithium? Hedge with short copper futures (0.62 corr)
Warning Signs
- ⚠ Gold/silver ratio >60 or <45 = unstable, reversion likely
- ⚠ Copper/gold ratio breakout = major economic regime shift
- ⚠ If correlations suddenly spike to 0.9+ = liquidity crisis forming
Scenario Analysis & Stress Testing
Model extreme scenarios to understand portfolio vulnerabilities. 2026 geopolitical environment requires planning for black swans.
Scenario 1: Supply Shock
Trigger: South African mine strikes halt 70% of palladium/platinum production for 3 months
Price Impacts:
- • Palladium: +60% ($1,200 → $1,920)
- • Platinum: +40% ($1,550 → $2,170)
- • Rhodium: +80% ($4,400 → $7,920)
- • Gold: +5% (safe haven bid)
- • Copper: -8% (auto production cuts)
Portfolio Impact:
Unhedged PGM exposure: -45%
Hedged (50% put options): -18%
Protection Strategy:
- • Buy 6-month put options on PGM ETFs
- • Limit PGM allocation to 5% max
- • Short auto stocks as correlation hedge
Scenario 2: Demand Collapse
Trigger: Global recession, industrial production drops 15%, construction down 25%
Price Impacts:
- • Copper: -40% ($10,000 → $6,000/t)
- • Aluminum: -35%
- • Zinc: -42%
- • Lithium: -50% (EV sales crash)
- • Gold: +15% (recession hedge)
- • Silver: -20% (industrial > investment demand)
Portfolio Impact:
70% industrial metals: -32%
Balanced (50% gold, 50% industrial): -8.5%
Protection Strategy:
- • Increase gold allocation before recession signs
- • Sell covered calls on industrial metal holdings
- • Monitor leading indicators (PMI, ISM)
Scenario 3: Geopolitical Crisis
Trigger: Major conflict, sanctions on Russia/China, trade war escalation
Price Impacts:
- • Gold: +25% ($4,620 → $5,775)
- • Silver: +45% ($88 → $127)
- • Russian metals (Pd, Ni): +70% (sanctions)
- • Chinese rare earths: +90% (export ban)
- • Copper: +18% (supply disruption > demand fear)
Portfolio Impact:
Physical gold/silver heavy: +28%
Paper futures (margin calls): -15%
Protection Strategy:
- • Hold 50%+ in physical metal (delivery risk mitigation)
- • Maintain 2x normal cash reserves for margin
- • Diversify metal storage locations (geopolitical spread)
Portfolio Stress Test Template
Run these calculations monthly to identify vulnerabilities:
Questions to Ask:
- 1. If my largest position drops 30% overnight, what's my total portfolio loss?
- 2. Can I meet a 50% margin increase without liquidating?
- 3. If liquidity dries up, can I exit positions within 48 hours?
- 4. What's my maximum drawdown if all metals drop 20% simultaneously?
- 5. Do I have uncorrelated assets (bonds, cash) to rebalance from?
Action Thresholds:
- ✓ If single position loss > 5% portfolio: Position too large
- ✓ If can't cover 50% margin increase: Over-leveraged
- ✓ If exit takes >3 days: Too illiquid
- ✓ If max drawdown > 25%: Insufficient diversification
- ✓ If no dry powder for rebalancing: Add cash/bonds