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Copper & Gold Weather Report

Monday March 25, 2013 11:18

I've lived in good climate, and it bores the hell out of me. I like weather rather than climate.

John Steinbeck, American Author

Mar. 25, 2013

If the late John Steinbeck liked weather, he may have enjoyed watching storm water wash over the bow of the good ship Metals on March 18. Floundering off the coast of the eurozone island of Cyprus, Captain Gold raced to the bridge and First Mate Copper headed below.  The Captain bolted into the wheelhouse above the elusive $1,600 per ounce level propelled by fears that draconian remedies proposed for the Cyprus debt crisis would precipitate a run on the banks in southern Europe. His fearless mate broke deck levels to the downside that many believed to be solid support. Comex copper touched $3.410 per pound during the day before closing at $3.428; Comex gold closed at $1,604.60 per ounce. The following day copper plumbed a $3.388 low, a price not seen since August as gold took another bump up to close at $1,611.30.

As dramatic as this week started for the yellow and red metals, Steinbeck would probably be bored by the overall market climate. Domestic markets took notice of Cyprus with a small pullback but still remained at complacently high at levels not seen since October 2007. The Dow Jones has regularly set new records and the S&P 500 is only several points away.

In truth, there was no crash in copper prices like the aftermath of the 2011 U.S. debt grade. By the end of the week, Comex copper climbed a few ladders back to near its prior March lows and above previous consensus support ($7,600 per metric ton, Note 1) to close at $3.466 per pound ($7,641 per ton). Captain Gold closed at a respectable but not breathtaking $1,606.10. Although it is comforting to see gold above $1,600 again, its overall price performance has been abysmal for months and far below the $1,800 level of last October.

March 18 was an early spring storm at best; is there worse weather or even climate change ahead for markets?

Trapped in a stationary front

The relation of gold with global commodities copper and oil reveals much about markets. The yellow metal often runs with commodities but can also play the part of monetary alternative, safe haven in crisis or some mix of both.  This week, gold quickly moved away from the commodity camp to safe-haven status in response to the Cyprus debacle. Only last week, the yellow metal was strongly correlated with copper and oil on a 1-month basis (+0.89 & +0.81, respectively); by Friday’s close, the correlation was negative for copper and falling for oil (-0.49 & +0.57). This is often a bearish sign for these key commodities but bullish for gold.

My March 11 Kitco commentary noted that short-term correlations can be “fickle” and looked at the stability of the gold-to-copper ratio, or GCR, as an alternate method for divining market direction. Copper was chosen for the analysis because it has lately shown a greater sensitivity to headline shock than oil. Figure 1 is an updated plot of ratio stability from Sept. 1, 2011 to Friday’s close where point “A” indicates the data on March 8:

Point A – Mar. 8, Ref. 4

Figure 1 – Gold-to-copper ratio stability (updated)

In this context, stability is defined as the standard deviation of the GCR normalized by its mean over a 1-month period (red triangles). The green line is an average stability of 3.2% from mid-2006 to the present. Accordingly, stability above the mean is considered potentially divergent, and below average to be “very stable.” Divergence typically occurs during periods of high market stress. As a matter of practice, I use a threshold of 3% to trigger a divergence warning. The 6-1/2 year period coincides with a time that gold has gained relative value, relative to copper (Ref 1, 2 & 3, Note 2).

After the U.S. debt downgrade, crashing copper prices created a divergent spike of nearly 6% on Oct. 6, 2011 following record gold prices that September. As previously noted, spikes above 3% occurred in June and December 2012 but with descending severity. An exponential fit of the data (gray dashed curve) is converging on a very stable 1% level which was also very close to the March 8 data (1.14%). The Cyprus crisis caused a gap higher to 1.82% Friday, but this is still far from the 3% threshold of concern.

Figure 2 is a similar plot to Figure 1 but extended over the entire period for the 1-month stability mean calculation: July 20, 2006 to Friday’s close.

Figure 2 – Gold-to-copper ratio stability since mid-2006

The data and exponential fit of Figure 1 are within the dotted ellipse of Figure 2 emphasizing the amazing relative calmness of the present gold-copper relation. Within weeks of the Aug. 5, 2011 U.S. debt ceiling downgrade, ratio stability diverged to a full 10.0 % followed by the 5.83% spike that begins the Figure 1 chart. During the darkest days of the 2008-2009 financial crises, stability divergence was even more extreme at 13.65% on Oct. 10, 2008. Other notable spikes are 7.44% on Nov. 12, 2007, one month before the beginning of the Great Recession, and 7.84% on May 17, 2010 as copper experienced a near 20% correction against a backdrop of rising gold prices.

By comparison, the good ship Metals is floating in the doldrums – at least for gold and copper.

Stormy weather?

A subtle warning is suggested by Figure 2. The November 2007, October 2008 and May 2010 extremes are followed by smaller spikes that ride an exponential decay that falls below the 3% threshold similar to the exponential model that follows the August 2011 10% spike. In each case, the decay is eventually terminated by a dramatic spike higher, something greater than 6% for the sake of argument. The periodicity of these “super-spikes” is also noteworthy, the longest being 19 months between the 13.65% and 7.84% spike; the shortest between 7.44% and 13.65% or 11 months. Presently the copper and gold markets are at 19 months without a ratio jolt higher.

This warrants further analysis but two thoughts come to mind. Global markets may be shifting to less turbulence in the commodity space as debt crises have less impact and economies sputter back to a broader based global recovery – this would be a climate change in which divergent super-spikes are much less frequent or nonexistent. Notably, the pre-recession January 2007 spike falls just below the ad hoc 6%-level when the world at least felt a lot more cheery. A more sobering thought is an unraveling of the economic progress made to date where a situation like Cyprus ignites a new financial crisis in Europe or brimming copper inventories in China presage a much more bearish assessment of the world’s second largest economy. Whatever the outcome, the stability of the gold-to-copper ratio is a valuable tool for market participants that seek to navigate the unchartered waters of today’s markets.

Note 1: R.J. O’Brien projected 3-month prices for copper with $7,850 per ton at the top end of the range and $7,600 at the bottom. (Metals, Mining & Macro Monitor, R.J. O’Brien Metals, March 11, 2013)

Note 2: The 6-1/2 year record for this analysis is Jul. 20, 2006 to Friday’s close, Mar. 22, 2013; a total of 80 months.


Ref 1: Oil, Copper & Gold – All in the Family (Richard Baker, Kitco commentary, Jan. 22, 2013)

Ref 2: Oil, Copper & Gold – Beware the Snake? (Richard Baker, Kitco commentary, Feb. 11, 2013)

Ref 3: Oil, Copper & Gold – Don’t Worry (Richard Baker, Kitco commentary, Feb. 25, 2013)

Ref 4: The Emperor of Metals Heeds a Warning from Copper (Richard Baker, Kitco commentary, Mar.11, 2013)


By Richard Baker, CP Value Analytics

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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