The predictive power of the copper-gold ratio

One key ratio to watch out for signs of a return to inflation is the copper-gold ratio. The copper-gold ratio is calculated by dividing the copper price (per lb) by the price of gold (troy oz).

Historically, the ratio has been strongly correlated with the yield on US Treasuries. A decline in the ratio (i.e low copper prices relative to gold) is a leading indicator for lower yields (and a less inflationary environment), while an increase in the ratio points towards higher yields (suggesting a higher inflationary environment). Importantly, its not the absolute level that’s important, but the strength of any change.

Demand for copper is highly sensitive to changes in global economic activity, and is used in everything from construction and infrastructure to consumer products. Hence the nickname “Dr Copper”. Meanwhile, gold has traditionally been a safe haven in times of uncertainty, increasing in price in times of financial and geopolitical stress.

It’s not perfect though and can give false signals. In the lead-up to the financial crisis in 2008/09 the ratio soared as copper prices rose, signalling higher inflation. In reality yields did rise, but no where near enough that suggested by the copper-gold ratio.

Related article: Copper prices: The top 10 most important drivers

Related article: Gold prices: The top 10 most important drivers

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