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As Copper Goes, So Goes Gold

Croesus Mine - Eureka Mining District, Nevada

March 16, 2015


  • An infrequent event has occurred in recent gold and copper markets. A stability map of the gold-to-copper ratio (GCR) is useful in understanding what this may portend.
  • Reviewing the period following the U.S. debt downgrade on August 5, 2011 is instructive in such analysis.
  • A compressing and more stable GCR suggests gold will follow copper prices in the near term – if the red metal declines, so will gold.
  • This is a contrarian view - Commitments of Traders (COT) data show commercial traders at a large net long position for copper, and net short for gold (as of March 10). 


Gold Ratio Stability Maps

A gold ratio that doesn't change much over time can be characterized as "stable." A rapidly changing ratio suggests market volatility and uncertainty or "stability divergence." I define stability as the gold ratio standard deviation normalized by its mean over a given time period (i.e. % wiggle over time). A stability map is the plot of two stability gauges with different periods. Fig. 1 shows the 3-month versus the 1-month stability of the gold-to-copper ratio (GCR) for the latter half of 2011:

Figure 1. Gold-to-Copper Stability Map (2011 copper crash)

Data points (yellow diamonds) correspond to the GCR on a market day; a "stability trajectory" is the path formed by connecting the data points (dashed red lines). A 3% criterion has proved a useful boundary between stable and divergent ratios.

The lower left quadrant is the "very stable region" where ratios of both 1- and 3-month gauges are less than 3%; the upper right quadrant is divergent with both gauges greater than 3%.
Late-July 2011 started in the "very stable region" but quickly departed to the upper right quadrant following the U.S. debt downgrade on Aug. 5, 2011. The ratio at that time was 401 pounds of copper for one ounce of gold. Importantly, the distance between points is related to the velocity of change (note the first two red arrows).

Key events in stability maps are trajectory "turns" in the divergent quadrant. Typically, the GCR peaks just before such turns.

In 2011, there were two major turns: on Aug. 23 the GCR peaked at 470 lb/oz and then again on Oct. 3 at 538 lb/oz (prior to turns A and B, respectively). Comex copper dropped from $4 to $3 from Sep. 6 to Oct. 3 as Comex gold set an all-time intraday high on Sept. 6 – a very turbulent time for metal markets.

After turns, the GCR decreases and an ounce of gold buys less copper. Since the Lehman Brothers bankruptcy Sept. 15, 2008, the average ratio is 408 pounds of copper for an ounce of gold. The GCR was near this long term mean as it left the very stable region in Fig. 1. Prior to the turns the GCR expands as gold prices rise and copper prices fall.

After turn B, the GCR compresses and stability is eventually restored (small green arrow). By the close of 2011, the GCR had fallen 15% to 456 lb/oz as it entered the very stable region.

2012 to the Present

Following 2011, there been only two major excursions into the divergent quadrant: spring of 2012 and late-2014 transitioning to early-2015. Fig. 2 shows the stability trajectory and turns over this period:

Figure 2. Gold-to-Copper Stability Map (2012 to present)

As in Fig.1, the GCR peaks prior to turns. For turn C the peak is 470 lb/oz on Mar. 13, 2014; for turn D, 525 lb/oz on Jan. 7, 2015 – maximums eerily similar to 2011 in magnitude and order.

The present trajectory appears to be headed for more stable behavior as the value of gold relative to copper decreases and the 1-month stability falls below 3% (note direction and close spacing of recent data points – small green arrow). The GCR closed at 433 lb/oz on March 13, down 18% from the January peak.

The GCR is least disturbed (i.e. most stable) when the prices of copper and gold move together. Although by Friday’s close, the 1-month correlation of Comex gold and copper was still negative (-0.15) it has recovered from a very negative correlation (-0.91) when the GCR peaked Jan. 7. As this correlation turns positive, the variations in the GCR will decrease further.

As copper goes, so goes gold

Given the above analysis wild price swings of either metal are unlikely in this increasingly stable environment and as copper goes, so goes gold. With WTI oil touching March 2009 lows this morning and the S&P Goldman Sachs Commodity Index (GSCI) scoring a new 2015 low, it appears the broad based commodity decline continues. If red metal prices decline from their March trading range, gold is likely to follow (further stable GCR compression) possibly testing its November low.

A colleague reviewing Fig. 2 pointed out, “The curious point related to this is that the COT data show commercials at a big net long position for copper, and net short for gold.  That pressure suggests relationships can break under the strain.”

My reply, “Admittedly the analysis is a bit contrarian but the infrequency of these large loop excursions followed by improved stability and value compression (relative to gold) seem to be fairly repeatable over the last few years. Let's see what the morrow brings...I'll stick with lower copper, lower gold for the time being.”

From the heart of North American Gold country – Cheers!

By Richard Baker
The Eureka Miner
Eureka, Nevada


Headline photo by Mariana Titus



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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