8 months ago • 2 mins
The copper-to-gold ratio is a sneaky little indicator that can tell you a lot about the economy's true colors. As an industrial metal used in construction, electronics, manufacturing, and elsewhere, copper tends to do well when the economy’s expanding. Gold, on the other hand, is generally seen as a safe-haven asset, and tends to do well when the downside risks to the economy are rising. Divide copper's price by gold's, and voilà: you’ve got a nifty snapshot of growth expectations versus economic uncertainty.
But there’s more to it. Since interest rates are heavily influenced by growth expectations and economic uncertainty (the Fed tends to cut rates when economic activity is dangerously slow, and raise them when it’s dangerously hot), the copper-to-gold ratio is also a great signal of where interest rates might be headed. When the economy sizzles and risks chill out, up goes the ratio – with interest rates typically following suit. As you can see in the chart, that’s exactly what happened in 2021, when the massive jump higher in the copper-to-gold ratio (white line) preceded a massive rise in the 10-year yield (blue line).
On the flip side, when the ratio tumbles, that’s a sign of an ailing economy and rising risks. In those cases, the Fed tends to slash interest rates, as investors scurry toward safe-haven assets like Treasury bonds, driving yields further down. (Remember: Treasury yields fall as their prices rise.)
That brings us to this year, and the copper-to-gold ratio has been slowly sliding down. Now, don't panic – this isn't an "economy-going-off-a-cliff" alarm. But it does highlight the gap between the stock market's swagger and the grittier economic scene. Most importantly, it whispers that bond yields might be too high relative to the macroeconomic environment. That may make Treasury bonds a tempting investment right now: they’re poised to perform well if sentiment sours, but have a dash of safety should economic growth bounce back...
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.
/3 • Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.