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Are Gold Prices Losing their Luster? What is Copper Telling Traders?

Are Gold Prices Losing their Luster? What is Copper Telling Traders?

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Precious Metals Update Overview:

  • Typically speaking, gold is the strongest precious metal during periods of high volatility, uncertainty and overflowing liquidity.
  • Gold should theoretically rise in a world with low interest rates and high deficits. It may not be the leader, in fact when we look at some of the internal workings within the metals market.
  • To find a period commensurate with current conditions, you may have to look at the post-Global Financial Crisis period in 2009.

Gold Prices Benefit in COVID-19 Era

In the midst of the global COVID-19 pandemic and throughout the first 3 quarters of 2020, gold prices have shown strength. Typically speaking, gold is the strongest precious metal during periods of high volatility, uncertainty and overflowing liquidity. However, the current economic environment expresses lower volatility and uncertainty as a result of vaccine optimism and economic rebounds in many global regions.

Easing & Stimulus – Good for Metals

Across the world, governments are spending in order to prop up fallen economies which in some areas are exciting growth. And with vaccines around the corner, this may be the beginning of the end with regard to the pandemic which has prompted unexpected changes within metals markets.

Gold should theoretically rise in a world with low interest rates and high deficits. It may not be the leader, in fact when we look at some of the internal workings within the metals market as a whole we can see that there are certain shifts within asset classes that suggests that traders are expecting a more favorable growth environment.

One such asset is copper. Copper can be used as a proxy for growth and is extremely responsive to global economic activity as the metal is used in many industrial processes. In risk-off environments, copper tends to be the worst performing metal due to its growth sensitivity while in risk-on conditions; the opposite.

Copper can be coupled with gold resulting in the copper/gold ratio. The copper/gold ratio is simply the price of copper per pound divided by the price of gold per troy ounce and can provide some key insights into other markets as well.

Metals as a Growth Indicator

There is an historical positive correlation between the copper/gold ratio and US treasury yields. That is, an increase in the copper/gold ratio is a leading indicator for higher treasury yields and vice versa. Other gold ratios like silver and platinum are exhibiting similar upward trends. The consequence of this is essentially inflationary which is likely to result in higher silver and platinum prices going forward.

The current rise in copper sources from an economic rebound in Asia alongside vaccine positivity, and coupled with depressed gold prices the result has been the copper/gold ratio increasing at one of its fastest rates over the past 20 years. This increase should translate to substantial increases in US treasury yields based on historical parallels however, this has not been the case. The level of correlation between the copper/gold ratio and US treasury yields may be changing together with the global economic system.

Just Like After the Global Financial Crisis

To find a period commensurate with current conditions, you may have to look at the post GFC period in 2009 or immediately after the 2016 election when there was the expectation of the reflation trade. Both periods included low rates alongside a pro-growth outlook, more stimulus and more deficit spending. These two occurrences preceded large upswings in copper relative to gold which signals expectant global growth.

As we start 2021, will US treasuries play catchup as projected by the historical copper/gold ratio or will the depressed inflationary environment continue to dampen yields? And will the spike in copper prices endure with hopeful growth predictions? As events continue to unfold, check back at DailyFX for updates and analysis on precious metals and from a both a macroeconomic and technical point of view.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist and Warren Venketas, Markets Writer

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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