Why the Copper/Gold Ratio is So Important to Traders
Why the Copper/Gold Ratio is So Important to Traders
The ratio is a harbinger of the economy. Today it is suggesting that yields will fall.
- Copper represents industrial demand and economic activity, while gold has limited industrial use.
- The gold/copper ratio is a leading indicator for Treasury yields, a topic we will delve into later.
The copper/gold ratio, calculated by dividing the price of copper by the price of gold, serves as a valuable tool for traders and economists. It illustrates the relative value of copper (/HG) against gold, (/GC).
Copper, indicative of industrial demand and economic activity, stands in contrast to gold, a safe haven asset with limited industrial use. The copper/gold ratio serves as a comparison between an industrial demand asset and a financial asset. This comparison provides unique insights that can be deduced by analyzing the direction of the ratio. Notably, it is a leading indicator for Treasury yields, a topic we will delve into later.
When there are expectations of an economic contraction, copper prices usually decline, while gold prices ascend. If gold's price increases at a faster rate than copper or falls at a slower pace, the ratio diminishes. Conversely, the ratio escalates when copper's price rises more rapidly than gold.
The chart below represents the copper/gold ratio as the price of copper per pound divided by the price of gold per ounce. While some prefer to calculate it on an ounce-vs.-ounce basis, the absolute value of the ratio is not the primary focus. What truly matters is the direction of the ratio and its divergence or convergence with Treasury yields.
![copper/gold ratio]](https://images.contentstack.io/v3/assets/blt40263f25ec36953f/blta743a68b0477bba8/64e66c60af6c4b74a42d1422/copper_gold_ratio.png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
What is the ratio telling us about Treasury yields?
The most recent multi-year high for the ratio was observed in October 2021, following a nearly two-year rally from a multi-decade low in April 2020. During this period, the ratio surged over 100%. However, since that October peak, the ratio has been on a downward trend.
The ratio's behavior as an economic indicator is logical, given that copper prices have dropped approximately 20% since then, while gold prices have risen by 13%. This indicates a slowdown in the global economy, a phenomenon we've seen reflected in economic indicators as higher interest rates permeate the economy.
Historically, the ratio has been a fairly accurate leading indicator for Treasury yields. This is primarily due to bond traders buying during times of economic distress, which drives yields lower, and selling when the economic outlook is positive, leading to a rise in yields.
So, should we declare a peak in yields because the copper/gold ratio is suggesting so? Firstly, it's crucial to identify some of the driving factors for bonds that might be causing this divergence. There's uncertainty in the market about whether the Federal Reserve has finished hiking rates. The supply of Treasuries through upcoming auctions is expected to increase as well, which may support yields.
However, if the Fed were to back down and rates top out at 5.00%-5.25%, that would likely signify the peak in yields for this cycle. In this case, the copper/gold ratio would once again prove to be a reliable leading indicator. This is my personal base case scenario. The implications would be favorable not only for yield-sensitive gold (GC) and silver (/SI), but also for equities such as Nasdaq (/NQ), S&P 500 (/ES), and Russell 2000 (/RTY).
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.