The 2012 Copper & Gold Conundrum

Tuesday April 03, 2012 10:37

The first quarter of 2012 witnessed some chilling downdrafts for gold and considerable price resilience for copper. Precious and base metals are undergoing a major but relatively stable re-pricing exercise given an emerging change in global outlook: better-than expected U.S. recovery, lower-than-expected Chinese demand for raw materials and a Europe that has stabilized but moves forward with serious challenges. By Friday, Comex gold closed at $1,671.90 per ounce up 7% for the year; Comex copper, at $3.8250 per pound up 11%. Not a bad showing for the two metals given the shifting sentiment from hard assets to the exuberance that pushed the S&P 500 up an impressive 12% so far for 2012.

What happens next? The relationship between gold and copper provides clues but also presents a curious puzzle for the two metals in the coming months. First, consider some of the puzzle pieces. My March 19 commentary noted a disturbing de-correlation of the red metal from gold. This continued into negative territory but fortunately has returned positive. Table 1 compares the 3-month to the 1-month rolling correlations for the Friday closes of March 16 and March 30.

Rolling Correlation - ?(Au, Cu)

March 16, 2012

March 30, 2012

Gold & copper - 1-month



Silver & copper - 3-month



Table 1 – Copper Correlations with Gold & Silver

The longer-term number has fallen from high (> +0.8) to moderate correlation as the short-term correlation recovers nicely to +0.3. Typically negative correlations are bearish indications; the extreme example is when a geopolitical shock spikes gold prices higher and tumbles base metal prices lower. Positive one- and three-month correlations now bode well for copper – so far so good.

A look at a recent history of gold-to-copper price ratios reveals more pieces and a glimpse at the puzzle itself. Figures 1 is an update to a six-month ratio chart from previous commentaries for the yellow and red metal:

Figure 1 – Gold-to-Copper Ratio

*Ratios of most active COMEX futures contracts

“Point A? - Silver & Copper 2012 - A Tale of Two Metals (Kitco commentary, March 5, 2012)

“Point B? - Copper Bids Adieu to Gold and Silver (Kitco commentary, March 19, 2012)

Gold-to-Copper Ratio (GCR)

The three-month moving average of Figure 1 (solid red-brown line) shows that copper is gaining price strength relative to gold in 2012, another bullish indication for the red metal (large green arrow). This explains why the end-of quarter-gain is nearly double for copper compared to the increase for gold.

The compression of the late-2011 gold-to-copper ratio (GCR Figure 1, red-brown triangles) to present levels (yellow diamonds) also remains below the moving average on a day-by-day basis from previous reports (Points A & B). Friday closed at 437.1 beneath an average of 447.3 pounds per ounce and nearly 19% compressed from the 538.3 pounds per ounce peak of Oct. 3, 2011.

Now the puzzle - as nicely as copper prices are behaving relative to gold, the ratio is still bearishly distant from a mid-$300 pounds per ounce “norm? (dotted red-brown line). This analysis uses the Nov. 26, 2010 GCR for a norm because it marks a period when not only gold-to-copper but gold-to-silver and –oil ratios returned to near historical averages after the extreme volatility of the 2008-2009 financial crisis. The GCR on that date was 363 pounds per ounce. My Jan. 30, 2012 commentary, argues that the red metal will remain in bear country until the GCR crosses below the “Bull/Bear Threshold? of 400 pounds-per-once shown by the solid red line. With only 37 pounds per ounce above the threshold, the slope of the 3-month average suggests bull pasture may be in sight by late spring or early summer if the trend continues.

Gold-to-Copper Ratio Stability

This commentary began by noting that the 2012 metal re-pricing has been relatively stable. Commodity Ratio Stability© (CRS©) analysis offers a simple technique for assessing the stability of the gold-to-copper ratio stability and future trends. Figure 2 shows a map of the year-to-date 3-month versus 1-month gold-copper CRS from the last market day of 2011 to the present:

Figure 2 – Gold-Copper Stability Map

CRS variations (red-brown points) of less than 3% are considered “very stable?; if the 1-month CRS is below this level (vertical line & gray arrow), the GCR is considered very stable on a short-term basis. Similarly, a 3-month a CRS less than 3% demonstrates excellent mid-term stability (horizontal line & purple arrow).

Bearish divergence occurs when the CRS moves significantly above 4%. During some of the most volatile periods for gold and copper prices in 2011 the CRS exceeded 12% on a three-month basis. By contrast, the CRS now lies within the “very stable? region (gray-shaded square) along with the Nov. 26, 2010 benchmark after a bearish sojourn to higher levels (large red-brown arrow). The present direction of the CRS trajectory (re-brown line) indicates improving stability in the short-term.

Gold-copper stability is paradoxically very close to the November 2010 norm, but the GCR is bearishly far away. A bullish scenario for the red metal would be a manageable loss of stability that allows copper price to gradually rise faster than gold price. This would close the gap of the present GCR with the 400 pound per ounce threshold and allow a move to levels closer to the norm later this year. A return to negative correlation produces the opposite affect – a divergent de-stabilized ratio and bearishly higher levels.


Copper giant and bellwether miner Freeport-McMoRan scored an anemic end-of-quarter gain of 3.4% as copper prices posted 11%. This is further evidence that all is not well for the red metal. The copper and gold conundrum for 2012 is how to escape the bearish price domain entered shortly after the various debt debacles of early-August 2011. By the Aug. 5 U.S. debt downgrade of last year, the GCR had risen to 401 pounds per ounce and it has remained stubbornly above that level ever since.

The good news is that a consistent trend to lower levels should revive copper mining equities and support a gradual increase in copper prices. However, this may be at the expense of gold prices – breaking the psychologically important $4 per pound level implies a lower gold price of $1,600 per ounce if the bull/bear threshold is achieved. Even with further quantitate easing (e.g., QE3), it is unlikely that copper prices would exceed $4.5 per pound in 2012 implying a $1,800 per ounce ceiling for the yellow metal by the same line of reasoning. A geopolitical shock may spike gold to $1,900+ per ounce but the red metal would surely respond with bearishly lower prices – a real puzzle for both metals to solve in the months ahead.

By Richard Baker, CP Value Analytics

Related Kitco commentaries by Richard Baker:
Copper Bids Adieu to Gold and Silver (March 19,2012)
Silver & Copper 2012 - A Tale of Two Metals (March 5, 2012)
Copper and Gold Plan Their 2012 World Tour (Jan. 30, 2012)
What does CRS© tell us about Gold, Copper & Oil? (Nov. 28, 2011)

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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