Copper / Gold Ratio Screaming

We’ve written before about the oft referenced “Dr Copper” and its historic role in finance as a leading indicator. Today we look at the Copper/Gold Ratio, its historic correlation with US Treasuries and how, right now, it is screaming rate cuts dead ahead.

Copper, as one of the key ‘ingredients’ of industry and the associated economic activity is often looked to as a key indicator of industrial economic health. On the other hand, we have the metal of gold which nowadays has very limited industrial use but stands as the pre-eminent monetary or ‘risk free’ non inflationary hard asset. The ratio therefore provides a unique comparison and insight into the health of the economy and the market’s appetite for risk. For that reason, the so called (though increasingly dubiously named) ‘risk free’ financial asset of US Treasuries historically hold a close correlation with this ratio and more particularly its trajectory. When that correlation breaks, as it is right now, the ratio can become a predictor of what’s coming. In past occurrences of divergence, the 10yr US Treasury yield has eventually tended to ‘capitulate’ and move in the same direction as the copper/gold ratio.

The chart below shows this very clearly. The beginning of this century saw copper prices soar and the ratio correct dramatically before the GFC, and despite gold also doubling over the same period. Along came the dramatic rate cuts and monetary stimulus post GFC.

We then saw COVID in 2020 and the ratio more than double. Inevitably we then saw US Treasury yields follow suit, correct somewhat in 2022 but then continue amongst the post COVID inflation surge. When we look at that today we see the ratio both heading down (trajectory) and the incredible correlation divergence with yields still relatively very high amid poor economic fundamentals. If ever there was an ‘alligator jaws’ scenario of a snap shut the chart below is compelling.

This of course sits consistently with the US Fed clearly signalling the next move is cutting not rising, nor holding for much longer, and supported by a raft of poor economic indicators of late. The easy money is about to come with vengeance. Printers go brrrrr… as they say.

This, and the movements in the chart above, are also consistent with our Chief Economist’s monthly Global Liquidity Index updates. The last was here if you missed it, and the next due this Thursday. They are a ‘must read/watch’ each month as this set up is very constructive for future gold prices.

It then becomes a matter of whether you buy your gold before or after the jaws snap shut…