Financial Education | 2 October, 2017

Copper: world economy expansion

Albert Estruch Gestor de Mercados

Gold vs copper

 

In the decision of whether to invest in gold or in copper, there are two very different underlying views of the future of the world economy.

Gold may be seen as a safe-haven asset that enables us to maintain our wealth when up against scenarios such as economic depression or raging inflation. The investment in copper implies totally the opposite, wagering on higher world economic expansion based on an increase in demand in sectors like construction, transport and industry.

If we divide the price of copper by that of gold we would have an estimate of the market’s economic outlooks. We can draw some interesting conclusions from the relative performance of these two assets.

  • If the ratio falls because investors are buying more gold than copper, this would imply a more negative view of the economy.
  • Alternatively, higher copper purchases compared to gold would imply an expansive view of the economy.

Impact on US long-term interest rates

10-year bond yields are a very important indicator of long-term economic growth; a higher bond yield implies higher growth and vice versa.

If we compare our copper-gold ratio indicator (in green) with the yield from US 10-year bonds (in blue), we can also draw some interesting conclusions.

 

Conclusions

  1. We can see how the market is currently prioritising the purchase of copper over gold because the ratio (in green) has risen sharply since January 2016.
  2. Comparing the US 10-year bond (in blue) on the same graph we can conclude that bond yield should rise to 2.6% in the short term, which would be the highest return since October 2014.
  3.  A higher economic expansion than at present, which could have negative consequences on long-term fixed income assets.