Gold-Copper Ratio Points To Debilitating Economic Health Issues Ahead

May 18, 2023, 10:22 AM EDT
This article is more than 1 year old.

We frequently talk about the gold-silver ratio, but often the gold-copper ratio can be a more telling indicator when it comes to assessing the health of the economy. “Dr. Copper” is known for its ability to signal when the economy is ‘unwell’. As you will read below, the readings on the doctor’s chart are strong and this, combined with the gold price, tells us something many of us have been saying for years: we are about to head into some very tough economic times, indeed. 

The gold to copper ratio is pointing to slower economic growth and increased safe-haven demand.

The gold to copper ratio is an account of how many ounces of copper it would take to purchase one ounce of gold and history shows that the past peaks of this ratio coincides with the crisis. Copper is often referred to as “Dr. Copper” for its uncanny ability to predict economic health. Copper is an industrial metal used in building and performs well during economic expansion.  

Gold, on the other hand, is a safe-haven asset, which investors turn to in times of financial and geopolitical crisis, which makes it an indicator of fear in the market.

Gold to Copper Ration Chart

As we discussed in the post on April 13 “Has the IMF Told the World to Buy Gold?”, the IMF in its April World Economic Outlook is forecasting slower world growth, in brief: Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. 

And just this week a Wall Street Journal headline read China’s Recovery Loses Stream, Signaling Trouble for Global Economy: Country’s youth unemployment hits record high as new economic data falls short of expectations. 

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The article went on to say that: China’s post-Covid growth spurt is sputtering and its youth unemployment rate hit a record high, signaling trouble for a recovery that was expected to boost global growth. A bundle of economic indicators for April, including retail sales, factory production, and fixed-asset investment, fell short of economists’ expectations, according to data released Tuesday by China’s National Bureau of Statistics. Investment in the country’s property sector also dropped in the first four months of the year.

Does the US need a lie down?

The signs of recession are prevalent in the US, unemployment claims are rising, negative leading indicators for the past several months, and the inverted yield curve to name a few of the major signs – see our March 8 post Reading the Signs: Is the US Economy Headed for Recession?

There is no shortage of potential geopolitical and financial crises on the horizon. Some will be swept under the rug, or ‘kicked down the road’, some will fester for several years before blowing up and others will crack open. Three key geopolitical/financial crises on the near-term horizon that could be the next ‘spike’ in the gold to copper ratio are: The US debt ceiling debate in Congress, the China/US political relationship, and U.S. banking/commercial real estate problems.

Congress is no doubt pushing the debate over raising the debt ceiling to the eleventh- and three-quarters hour – and possibly even beyond. U.S. Secretary Janet Yellen has warned Congress that the final deadline is June 1st before the U.S. is no longer able to pay all its bills. And even if she is ‘bluffing’, this dalliance until the very last moment is costing the U.S. due to higher interest and further eroding confidence in U.S. debt.

Treasury Secretary Janet Yellen warned that the US is already paying a price for its failure to raise the federal debt limit, as talks between the White House and lawmakers from both parties continued into a second week. 

“We have already seen Treasury’s borrowing costs increase substantially for securities maturing in early June,” Yellen said in a letter to congressional leaders Monday. That’s the time period by when the Treasury risks running out of sufficient cash for all federal obligations … Yellen stuck with her warning that the Treasury could run out of cash as soon as June 1. The department has been deploying special accounting measures since January to stay within the $31.4 trillion statutory ceiling.

“We still estimate that Treasury will likely no longer be able to satisfy all of the government’s obligations if Congress has not acted to raise or suspend the debt limit by early June, and potentially as early as June 1. 

The world’s health depends on US-China relations

The sanctions against Russia have added to an already tense relationship between China and the US. And the relationship between the two countries is likely to be one of the key points in the November 2024 U.S. election.  Martin Wolf in an article titled US-China relations have entered a frightening new era in the Financial Times writes: the relationship between the US and China is likely to determine humanity’s fate in the 21st century. It will determine whether there will be peace, prosperity and protection of the planetary environment, or the opposites. 

Both the US and China oscillate between warning the other and ‘being friends’ and pretending that there are no problems between the two countries. But it will not take much of a disagreement to bring the underlying issues to a head and for a fallout to be the outcome.

The banking sector problems are still unfolding. There are still banks that are struggling to meet deposit demand as higher yields lower the value of a bank’s assets. This is a topic we have covered many times over the last two months as it is a key reason central banks are likely to pivot to easier policy and more money printing despite inflation being above their two percent targets. Tied to this is the two-fold problem in the U.S. commercial real estate sector, which are low lease rates compounded by falling values.

All of this adds up to the gold to copper ratio going up as gold prices climb on safe haven demand while copper prices struggle on economic weakness. 

Did you see this week’s technical analysis with chart expert Gareth Soloway? Tune in to see what he thinks the catapult will be, to send the gold price higher. 

Gareth Soloway – This is the catapult that will send gold to new highs

From The Trading Desk

Market Update:

The gold price hit a 2 week low moving and closing below the $2,000 level.

The move itself was not that unexpected, something we covered in our market update interview on Tuesday with Gareth Soloway.

The uptrend is still in place and we are very much in a consolidation phase.  

Data out of the US this week remained strong despite the recent rate hikes.

US retail sales, industrial output, and housing market activity all came in stronger than expected, meaning rates may go higher still or stay higher for longer.

The lagging effect of these rate hikes is taking time to feed through as the Fed tries to navigate a ‘soft landing’.

The USD gained too which has a negative correlation on the price of Gold. 

A deal to raise the US debt ceiling is close to being agreed, without a deal the US could enter a default on its $31 Tr debt as soon as June 1st.

We have been here before, this does not solve this issue just delays the inevitable for now. 

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