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Category: Glint's Helpful HInts

Glint’s Helpful Hints: Red and yellow

People naturally want to know how well their gold holdings compare to others, whether those are fiat currencies (such as the Dollar), house p...

30 June 2022

Gary Mead

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People naturally want to know how well their gold holdings compare to others, whether those are fiat currencies (such as the Dollar), house prices, or other commodities, such as copper.

The copper price is often regarded as an accurate barometer of the stages of global economic growth; a guide to trends. The stronger the economic outlook, the greater is the demand for copper. It’s a key industrial metal, with more than 65% of it going into building construction and electronics. With the shift away from the internal combustion engine (ICE) to electric vehicles (EVs) the demand for copper should rise considerably. Conventional ICE vehicles contain 18-49 pounds of copper, hybrid electric vehicles (HEV) contain approximately 85 pounds, plug-in hybrid electric vehicles (PHEV) use 132 pounds, and battery electric vehicles (BEVs) contain 183 pounds. The copper/gold ratio is therefore a supportive guide to what’s happening in the world economy.

The copper/gold ratio is calculated by dividing the market price of an ounce of copper by the market price of an ounce of gold. The two over many years have been highly correlated – they have a strong relationship. During times of economic and geopolitical distress gold generally tends to perform well, because it is essentially a leading indicator of fear. Copper is the exact opposite. Because it is a key industrial metal that is used globally in a wide range of industrial applications, it performs strongly when the global economy is firing on all cylinders.

A declining copper/gold ratio shows a weakening economy, while a rising ratio shows a strengthening economy. A decline in the ratio (i.e. low copper prices relative to gold) is a leading indicator of a less inflationary environment, while an increase in the ratio suggests a higher inflationary environment.

What is the copper-to-gold ratio now telling us? In periods of accelerating economic activity, an industrial commodity like copper will rise in price against gold. Copper this week has fallen to a fresh 52-week low, below $4/pound. The relative strength of copper versus gold has fallen by 15% since the beginning of June and is now trading at the lowest level since February 2021. For some, this implies we are headed for a slowing economy. The copper/gold ratio may also be signalling that the US Federal Reserve, which currently is embarked on a round of interest rate rises, may find that trajectory more difficult as the economy slows. And while the gold price remains relatively elevated, the ratio may even by implying that stagflation is close.

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