The Copper-To-Gold Ratio Is Hinting At A Boost For This Asset

Copper and gold aren’t just shiny stuff: compare their prices and you’ve got an effective economic indicator that reflects the balance between growth expectations and economic uncertainty. Copper, used extensively in various industries, performs well when the economy expands, while gold, a safe-haven asset, thrives as economic risks mount. So the copper-to-gold ratio rises when the economy’s improving and falls when it’s slowing.

Since last year, the ratio’s been falling. Now, this might not be cause for immediate alarm, but you’d be wise to pay attention to what it's subtly articulating, particularly in light of the recent rally in stocks. See, it’s currently indicating a divergence between the buoyant confidence reflected in the price of financial assets and the more gritty realities underlying the broader economy.

And here's where it gets interesting: typically, interest rates (blue line) and the copper-to-gold ratio (white line) go hand in hand. When the economy overheats, the Fed typically hits the brakes with a few rate hikes; when it’s cooling off, the Fed typically turns up the heat with rate cuts. But sometimes, there's a wrinkle. Right now, for example, interest rates haven't followed the copper-to-gold indicator downward and are significantly higher than what this economic barometer would suggest. History tells us this shouldn’t last for too long, and that interest rates are likely to follow suit, as they did in 2021.

This scenario is making government bonds look particularly appealing. If the economy is, in fact, weaker than it appears – implying that inflation won’t be as big a bogeyman for long – then we could see the Fed cut interest rates. That scenario would likely push government bond prices much higher, particularly if sentiment deteriorates too. Of course, a strong economic recovery would have the opposite effect on interest rates and bond prices. But the currently wide gap between interest rates and the economic reality shows that there’s some margin of safety here. Put more simply, this seems like an interesting asymmetric trade idea. For a slice of the action, consider buying US government bonds via the iShares 7-10 Year Treasury Bond ETF (ticker: IEF; expense ratio: 0.15%).