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Copper/gold ratio shows Fed monetary policy is too tight - MKS PAMP

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(Kitco News) - As recession fears continue to rise, one market analyst said that one barometer could indicate that the Federal Reserve is close to shifting its monetary policy, which would be positive for gold.

In a recent research note, Nicky Shiels, head of metals strategy at MKS PAMP, said that she is paying close attention to the copper/gold ratio as it falls to a critical level.

"It serves as an indicator of the market's appetite for risk, and it can be a leading indicator for the direction of interest rates," she said in the note.

Analysts have noted that in recent months copper prices have slid sharply lower as investors see a growing risk of a recession as a contraction in the global economy would lead to lower copper demand.

Currently, copper prices are trading at their lowest point this year; Comex high-grade copper futures last traded at $3.288 per pound. Although gold prices have struggled, falling to $1,700 an ounce, it has outperformed copper. The industrial metal has lost more than 26% so far this year. At the same time, gold prices are down roughly 7%.

"The Copper/Gold ratio is nosediving, driven by a relatively larger copper repricing lower; that contrasts strongly with Fed funds rate which is accelerating (off a low base) in 50-75bp clips, in order to tame inflation," said Sheils.

Shiels noted that the collective price action in gold and copper is creating deflationary signals for the market; however, the ratio compared to U.S. interest rates shows a solid stagflationary environment.

In a comment to Kitco News, Shiels said this could provide gold with new bullish momentum as it continues to hold critical support.

The gold market has turned bearish

"Overall, we still believe we are in the early stages of a stagflationary backdrop, in which gold should perform. A US$ reversal and/or the return of investor confidence to the broader markets should provide necessary tailwinds," she said.

Shiels said that the copper/gold ratio versus interest rates has dropped to 4.3 points, which could be an important level for future monetary policy. She added that it could indicate that the U.S. central bank's monetary policy is already too tight.

"If and when the Copper/Gold ratio falls below 4, it has, in the past, marked the end of a Fed cycle," she said. "Thus, sitting at 4.3 indicates we are nearer to the Fed dovish pivot and/or closer to the terminal rate than the market appreciates."

The comments come as the market sees the Federal Reserve raising interest rates by 75 basis points at the end of the month. At the same time, markets still see a 33% chance that the central bank will move by a full 1%.

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 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.