Thursday, March 18, 2010

Copper to Gold Ratio - Warning

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Copper price action is often used as a way to gauge economic demand. It has even garnered the nickname "Dr. Copper" for its "ability" to judge the health of the underlying economy. Copper is used in many goods including housing, cars, and manufacturing, so this sort of makes intuitive sense.

Now, like any indicator, it is not always correct. When copper "stalls out" while the stock market keeps moving higher, this is a warning sign. A daily chart of copper ($COPPER - green area plot) versus the S&P 500 ($SPX - black linear plot) during 2007-2008 gives a recent example of copper's ability (or lack thereof) to warn stock speculators:

Along those lines, copper at this point has failed to make a new intermediate term high above its January peak, unlike the stock market. Of course, I don't know if copper is going to turn around next week and make new highs or not. I am not making a specific copper price prediction here, although I wouldn't go long copper here even if the money to speculate on this outcome was given to me for free.

But I wanted to comment more specifically on the copper to Gold ratio (i.e. the copper price in U.S. Dollars divided by the Gold price in U.S. Dollars), which is a lesser known but interesting ratio chart to monitor. It is not predicting rosy times ahead for the stock market or economy on an intermediate-term basis.

Here's the copper to Gold ratio (i.e. $COPPER:$GOLD - green area plot) on a weekly chart over the past 5 years versus the S&P500 (i.e. $SPX - black linear plot) with my thoughts:

And here's some recent chart action of the copper to Gold ratio, using the ETF proxies of GLD for Gold and JJC for copper (i.e. JJC:GLD) so that I can show part of today's action:

Because this is a ratio chart, it doesn't require the copper price to decline for the ratio to decline. It simply means Gold is likely to outperform copper, and this is not a sign of a healthy economy. Since I think the U.S. Dollar is in a topping pattern, copper could actually go higher or at least tread water while Gold explodes higher. This would be a sign of "unhealthy" inflation (i.e. not the "healthy" kind that makes many of the herd feel richer).

I remain long things precious and metal and wildly bullish on the intermediate and long term prospects for Gold and Gold miners, regardless of what the general stock market does. On a side note, those looking for fundamental data on miners should check out this new site: It is free for now, though I doubt it will stay that way for long. My efforts to provide an updated junior Gold miner spreadsheet were short-lived, as I don't have the time or energy to keep it up to date. I have decided to just stick with the smaller cap Gold mining sector as a whole using the GDXJ ETF for most new long trades in the junior mining patch. I will leave it to others to discover "the next ten bagger," although I hope (wish? pray?) that they will post a comment or two when they find it...

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