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

(Visited 3,956 times, 66 visits today)

By .

If you enjoy my work then please consider subscribing to my email updates and newsletter, and buying my books.

My latest book Pay Attention: 101 Ways To Tame The Narrative Machine, Be A Smarter Media Consumer And Stop Outsourcing Your Thinking is now available to buy. Listen to a sample of the Audible version

Check out my online course on Skillshare. 200+ students have watched everything you need to know about commodities in less than 60 minutes (link gives you 2 months free) Join - Skillshare

Materials Risk is a commodity intelligence and advisory firm. We provide financial market and economics related content, commodity market training, strategic advice and economics consulting. For more information see 'Services'.