Copper Vs Gold - A Macro Microcosm

Last week I outlined some of the extreme moves in bond yields, and this week I'm taking a quick look at one of the bond market's close traveling companions; the copper to gold ratio.

It's an interesting indicator to track for a few reasons, but the basic intuition or reason for tracking it is that copper tends to respond to swings in global growth and gold tends to respond to swings in risk appetite. Thus a situation where growth slows and risk appetite turns sour should see the copper to gold ratio collapse.

And that's exactly what we've been seeing lately.

Indeed, some of you will recall some form of the below chart which was wheeled out when bond yields were rising as a reason for yields to keep rising, and then when the ratio rolled over as a harbinger of lower yields. It makes a degree of economic sense given bond yields tend to respond to growth and risk appetite in the same manner as well.

So if we (or at least me) think that bond yields look overdone, is the collapse in the copper to gold ratio also overdone?

It's an important question, and its answer will depend in large part on whether the global economic cycle is at its end ...or about to extend. If the global policy pivot by central banks can help avert a recession then one of the first places that we will be able to see it will be in the copper to gold ratio (as it turns back up).  

But at the same time, these are markets, and changes in risk appetite and growth expectations are just as much about swings in sentiment as they are about reality. 

Perhaps the best way to show this, and probably a good indicator to track for making judgments about the future path of the copper to gold ratio, is the spread in speculative futures positioning for copper vs gold. The chart below shows the copper to gold ratio against this relative futures positioning indicator, and perhaps unsurprisingly it has fallen to an extreme low.

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