GAUGE: The copper/gold price ratio is a market barometer of risk appetite, recession risk, and long term bond yields. Its predictive power comes from the very different uses of these two commodities. Gold is the longest standing safer-haven financial asset. Whilst copper’s broad industrial uses have seen it widely nicknamed ‘Dr. Copper’ for its ‘PhD’ in economics. The stable copper/gold ratio (see chart) is another indicator of growth resilience. Alongside the European PMI pick up back to 50, the firming US Q4 GDP NOWCast, and China’s reopening. This helps validate the recent sharp market relief rally and postponement of recession fears. But may also signal that the big fall in 10-yr US bond yields, that have helped growth stocks, has its limits.
COPPER: Its 25% rally from lows been driven by outlook for stronger Chinese demand. As it reopens its economy and supports its big property sector. The country has historically been 60% of global demand. ‘Green’ copper demand is also rising. The IEA has boosted its renewables investment outlook 30%, and Tesla’s price cuts will also help demand. Copper inventories are low and the supply side stressed. Largest producer Chile is forecasting 6% less production this year with lower grades and higher taxes. No. 2 producer Peru with renewed political uncertainty.
GOLD: Prices have rallied to nine-month highs as the US dollar has fallen 10% from its highs. This makes dollar denominated commodities cheaper for many. Whilst the Fed started slowing the pace of its interest rate hikes, with a March peak in sight. Non-yielding gold is particularly sensitive to this easing of rate competition. This has also been a key factor in Bitcoin’s explosive rally in recent weeks. Sentiment has also been helped by potentially lower import duties in no.2 consumer India, alongside the gradual return of investor ETF and central bank buying interest.
All data, figures & charts are valid as of 24/01/2023