WHEN THE COPPER/GOLD RATIO SPEAKS, WE LISTEN

The Copper/Gold ratio is one of those neglected ratios that few people look at yet gives us a ton of information regarding the economic strength picture. It's one of my favorite charts to look at to gauge the global economic environment. So, when the Copper/Gold ratio tries to tell me something I listen very attentively.

Back in November of 2021, I wrote about global equity markets potentially heading into a downtrend yet copper didn't confirm that turnaround, until recently...Copper tried breaking above five dollars per pound but wasn't able to and quickly turned back into the range which was already a huge signal of what was coming. In financial markets, from failed moves, come fast moves in the opposite direction. Here's the copper chart..

Now, the Copper/Gold ratio is giving us a signal too in the form of a very important breakdown of the sideways range.

Fundamentally, copper and gold don't really have a relationship, other than both being a metal. Gold is usually considered a safe haven, a repository of value during uncertain times. Gold has few practical applications, it's only somewhat used in electronic equipment and devices so the value of gold is not determined by it's industrial uses but by interest rates, inflation expectations, treasury yields, etc. The price of gold rises if the global economy is contracting or is expected to contract. The opposite is also true, owning gold when global economic growth is firing on all cylinders is usually not the best investment strategy.

Copper on the other hand is the bread and butter of the global industrial-, technology-, and real estate sector. It is an absolute key metal in production and construction. The price of copper will do really well when the world sees the economy rising and consumption increasing and will do the opposite if economic growth starts slowing down.

So, once we combine these two metals we get a ratio that very few investors and traders look at. Yet, the importance of the ratio between the two metals cannot be overemphasized enough. It is one of the most vital economic indicators that traders and investors alike can look at to gauge what the global economy is looking like. The Copper/Gold ratio is extremely simple to interpret too. If the economy expands we see this ratio increase. What if the ratio declines? Well, that means the global economy is finding headwind. Below you can find the chart of the Copper/Gold ratio with the Chicago PMI indicator to give you an idea of what the ratio signifies.

The breakdown of the range has some serious implications. It means we're heading for a slowing of the global economy. Of course, we don't want our whole narrative to be based on one ratio. The breakdown is further reinforced when we realize that the 2s10s inverted back in the beginning of April signaling an upcoming recession and that global economic indicators are declining. Global equities too have seen downtrends across the board after companies started reporting slower profit and revenue growth.

Take a look at the correlation between the Copper/Gold ratio and the US 10-year yield. The 10-year yield has the same characteristics as the Copper/Gold ratio in that it rises during an expanding economy and declines during a contracting economy. The breakdown of the Copper/Gold ratio signals us that it might be the end of the road for the rise in the 10-year yield. Implicating that treasury bonds might be getting some much needed love in the very near future. 

This is happening all while inflation is still running rampant. I'm not here to put fear into people, my sole goal is to make you stay alert to all possibilities. But, it is definitely not a pleasant picture we're painting here. We're heading into dangerous territory as the global economy has slowed while US inflation reached 8.5 percent, highest since 1981. These are the perfect circumstances for stagflation to rear its head.

The Federal Reserve has just recently started raising rates to combat inflation, but are arguably very slow in raising rates. A recession is nearing regardless and if the Fed decides to wait any longer we could be experiencing some serious hardships for quite a while. There's no real solution to fighting stagflation other than by tightening monetary policy which causes more headwind for the economy. So in a nutshell, there's going to have to be a trade-off.

What does this mean for us? It is difficult to determine the future with certainty but it would be a smart idea to start pulling back some of that risk exposure that has been building up the last few years, heading towards inflation protected bonds, gold or other commodities is the way to go if the Fed is slow in fighting inflation.