These Two Markets Are Telling Conflicting Stories About The Economy

These Two Markets Are Telling Conflicting Stories About The Economy
Andrew Rummer

over 2 years ago1 min

Two major financial markets – commodities and bonds – are telling conflicting stories about the health of the global economy. How the tension is resolved could have a major impact on your investments. 

The chart shows how the ratio of the copper and gold prices (in blue) has closely tracked movements in the benchmark 10-year US Treasury yield (in pink) over the past decade, before splitting apart in the early months of 2021.

Copper is a major industrial metal whose price often climbs when the global economy is growing, while gold is considered a safe haven and tends to do well when investors get spooked. Hence, the ratio between them – copper divided by gold – is considered a proxy for investor confidence in the economy.

Yields on US government bonds (a.k.a. Treasuries), meanwhile, are also very sensitive to economic growth expectations. They rise when investors are confident enough about growth  – or scared enough about inflation – to sell bonds.

At the moment, commodities investors appear to be really quite optimistic about the future, while bond investors are fearful. The tension could be resolved in a few ways: either investors decide to dump Treasuries in the face of mounting evidence of faster economic growth and inflation, or else they spook in the face of economic disappointment and shift out of copper and into gold. 

Keep your eye on how these two key indicators move in coming months.

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