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Dr. Copper and Mr. Gold

Copper and Gold


Market lore has it that copper has a PH.D. doctorate in economics, with an uncanny ability to predict turning points in the global economy. Copper is an industrial commodity that is widely used in applications in many facets of the global economy including in manufacturing, constructions, electronics, manufacturing, and other cyclical industries.


The demand for copper is often viewed as a leading indicator of economic health and therefore is extremely sensitive to the changes in global economic growth. Since copper is used for wiring in construction and manufacturing, as circuit boards and integrated circuits in smart phones and electronic, in motors and turbines, and in solar panels, rising copper prices is generally associated with strong copper demand and hence a growing/expanding economy. Many would say that when copper is surging higher it is often associated with risk on in the financial markets. However, when copper prices are plummeting lower it denotes a sluggish demand for the metal and hence, this warns of an impending economic slowdown.


The opposite of cooper is gold. It is classified as a precious metal. It is scarce, dense, virtually indestructible, valuable, and over the years have gained a reputation as classic store of value or store wealth. With these physical properties and attributes Gold is noted to be a risk off, safe-haven, flight to quality asset that performs well during recessions, slowing growth and periods of macro and geopolitical uncertainties. Since Gold has limited industrial applications this metal has not lived up to its reputation as a reliable inflation or currency hedge asset.


Copper/Gold Ratio (CGR)


The predictive power of the copper/gold relationship is primarily based on the different roles each of the commodities play in the global economy. The former is situated heavily in the physical aspect of the economy and the later in its reputation as a stored wealth. It is important to recognize the usefulness of any ratio analysis including the copper/gold relationship is not the current value of the ratio. Rather, what matters most is the directional trend of the ratio and the sustainability of the primary trend.


As you can see are the enclosed charts, since 2011 both the price of copper and the price gold have basically traded in sympathy with each other falling sharply from 2011 to 2016 and rallying from 2017 to 2018. However, since 2018 the copper/gold relationship has diverged from one another as copper has declined precipitously and gold has rallied sharply over the past two years. In the past eleven years, a well-defined downtrend channel has developed in the copper/gold ratio via a series of lower highs (Jan 2011, Dec 2017, and Jun 2018 highs) and a series of lower lows (Sep 2011, Jun 2016, and Mar 2020 lows).


Remember, when gold prices are outperforming copper it warns of a slowing economy as investors turn to gold as a protection against a slowing economy, macro, geopolitical, and medical crisis. However, when copper begins to outperform gold this signals a potential bottom in the contraction cycle and possibly the start of improving economic conditions. Mar 2020 bottom appears to be an important turning point for financial markets (commodities, fixed income, and equities). The ability of the copper/gold ratio to rebound from this major support zone (bottom of 2011 downtrend channel) hints of a pivotal directional turn (rising uptrend), at least from a near-to-medium term perspective.


Copper/Gold ratio and 10-year US Treasury Yield (TNX) Relationship


Historically, the directional trend of the copper/gold ratio (CGR) can lead the direction of the 10-year US Treasury yield (TNX). That is when copper/gold ratio trends higher or lower against a divergence by the 10-year yield. In previous divergences, the 10-year yield (TNX) tend to reach a climatic phase or capitulate to an extreme level and begin to move in the same general direction as the copper/gold trend. Looking at the past 9 years on the weekly chart the CGR downtrend may be coming to an end if it can successfully maintain above the bottom of its downtrend channel this year. In addition, the monthly chart shows a pivotal test is developing as CGR is currently testing major long-term support coinciding with the 1980 and 1987 lows. A successful test would be constructive and suggests the start of the next major rally in the CGR trend which can lead to progressively higher US interest rates (TNX uptrend).


Conclusion


Copper/gold ratio (CGR) is an important lead indicator to global economic conditions. A rising CGR trend supports the basis for improving or strong economic conditions. However, a declining CGR trend warns of deteriorating or weakening economic conditions. CGR appears to be rebounding from pivotal support near its 1980 and 1987 bottoms. The ability to sustain this rebound bodes well for an economic recovery and possibly the next business expansion phase.


There is positive historical correlation between copper/gold ratio (CGR) and the 10-year US Treasury yield (TNX). Since a rising or declining CGR and TNX trends depict the state of the global economy the recent strengthening of both the CGR and the TNX suggest that the global economy is beginning to improve and may even expand over time.



Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

Source: Courtesy of StockCharts.com

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