Copper Gold Ratio: Smooth Sailing Ahead

Copper set a new record high today on the London Metals Exchange, closing at $10,190 per metric tonne. In the media this was widely attributed to lower than expected inflation numbers from China (4.9% pa for January compared to 4.6% in December and estimates of 5.4% from a group of economists.

It is comforting to give reasons for every market move because it implies that there is rhyme and reason in the market. Reality is that day to day changes are usually not driven by any one event. Especially considering that copper has been on a tear. Wall Street is listening to the quacking copper ducks.

If you want to be exact, copper didn’t set a record on COMEX. And personally, I don’t think that this will stay the Bank of China’s hand. But in any case, all this reminded me of the copper gold ratio and how it has been shadowing the equity market for some time. I checked in with this indicator to see what it looks like now:

Remarkably, the relationship is holding. The price of copper, in units of gold is continuing to keep pace with the general movements in the S&P 500 index. In this chart it may look like the equity market has broken away (to the upside) but if we look at a shorter time frame, we see the relationship is still there:

I don’t want to appear that I’m suggesting that one can predict the equity market’s every gyration with the copper gold ratio. But generally speaking, they both follow the intermediate trend. This could be total coincidence. Or it could be that copper, as the most widely used commodity metal is telling us that the global economy is on the mend.

Just remember that the bearish case is very alluring as it – almost always – appears more intelligent than the bullish arguments. I’ve already mentioned the technical reasons for the continuing health of the bull market (on an intermediate to longer term), if you missed that, check out The Icarus Market.

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5 Responses to Copper Gold Ratio: Smooth Sailing Ahead

  1. PEJ says:

    Since the great reflation started, basically all asset classes have been moving together – even bonds and stocks have had a positive correlation of close to 1. The only negative correlation for the USD of course, but even that was not true for the whole period.

    Would be curious to see the chart from the late 1999 to find out whether your conclusion still holds?

  2. Daniel says:

    Correlated, yes, Babak, indeed. This is one of the easier intuitive-graspables in the world of investment. I should think Gypsum and the SPX would show a similar relationship. (Gypsum = drywall = economic activity = corrogated box factory output = scrap iron, etal.)

    But when, and where, do they tend to deviate? That is the question that can possibly yield advance advisory hints.

    There was once a time when the word “reflation” would cause someone to look at you oddly and hand you a tissue and say gesundheit. There was such fear of inflation there were “inflation premiums” built into various asset classes. The notion that one would ever want to add “flation” of any kind would have seemed odd, and people would be pleasantly surprised there was a specific word for such an act of pouring gasoline on an already hard-to-contain fire.

    Promises of “guns and butter” from irresponsible politicians filled the air. Like now. And this time of high inflation came out of a time of low inflation, which preceeded.

    Can such core-commodity//major stock index relationships, by the ebb and flow of their correlation-trending, their convergence and divergence, be able to supply a lead-time “tell” of direction at a key inflection pt or nexus pt in either market? (Does not matter which leads, in terms of price, either running back can be lead blocker and either can be bought as an ETF.) Might the point where ITEM per fixed currency unit (gold) starts to outperform SPX be the point where “reflation is good” is starting to be replaced by “inflation is rearing its ugly head”..?

    Counting that particular phrase about inflation, (which for some reason is a perennial FAD term, in the same way as “green shoots” was recently, and “Zombie Banks”, and all the others), and how often it appears, has in the past been like a rule of thumb sentiment gauge for me, about on the level of noting extremes in financial magazine cover pictures.

    However, the absence of certain terms can also reach a “crescendo”, to the careful listening ear. How long has it been since one heard the term “secular bear market”? Does everyone believe this past great secular bear market did in fact end, with P/E ratios (at their low) and dividend payouts (at their high)? Not saying it didn’t, just that “another 4–6 years ahead of secular bear market” sure got to be something one heard alot… and now scarcely a whisper.

    Maybe a significant divergence in this confirmatory-relationship will provide a whiff of a whisper as to when the next corrective phase for either will ensue.

  3. Jim says:

    Daniel, my take is that sentiment generally follows price, so naturally since the stock market has doubled from its 2009 lows we won’t be hearing about bear markets as much.

    When I find sentiment most useful is when it does something unexpected. For example, Babak posted that the average gold-timing newsletter is flat on gold (actually a tiny bit bearish), despite gold being close to its all-time highs and gold stocks seemingly testing the big breakout they had last fall.

  4. Daniel says:

    Very true, Jim. This site is indeed quite attuned to such nuances and divergences. Perhaps the most striking one I’ve seen in quite a long time was the one Babak was riding carefully and constantly, in its latter stages– the near universal concensus which arose that the Euro was toast, that its parity w the dollar was a When not if proposition. Frankly, it was so extreme, LOL. This site got the last laugh. I looked down for a couple of days and the Euro had blasted back up thru the 1.20/dollar zone into the 130s so fast it made my head spin and burned the toast the euro was supposed to be.

    But.. the kind of zoned out and total gestalt mindset I am referring to above is more of what George Soros was referring to, in his book ‘The Alchemy of Finance’. The point where a belief system becomes so self-reinforcingly self-evident that it ceases to be seen as an either/or kind of event, with debatable elements.

    And then, later, the question “what were they thinking” arises, and the answer is that a “self-referential process” carried the day, and more critical thinking was set to one side–in the way that all automatic habitual assumptions take root. And we’re all prey to such assumptions, because they are part of our natural and beneficial habit forming process which makes our thinking so efficient. However, in some areas, female psychology, financial market timing, horse racing, these usually beneficial processes can be inversely rewarded.

    So, en garde. Cavaet cogitator. Always.

  5. Pingback: Tuesday links: piling in Abnormal Returns

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