Cu-Au Ratio Reflects Concern

The contrasting fortunes of copper and gold over the past few months is instructive of the changing investor mood towards the global economy, and the ratio has just hit its lowest level in two years.

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Jun 10, 2019
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The contrasting fortunes of copper and gold over the past few months illustrates the renewed concern over the global economy. The precious metal is regarded as a store of wealth in troubled times, while the red metal is the bellwether of economic performance. Gold recently touched a four-month high whereas the price of copper has fallen throughout the June quarter so far.

Gold prices reached a new four-month high of US$1,344/oz on Friday (just US$3 shy of February's 10-month peak) as the US currency weakened following very disappointing jobs statistics. Instead of adding 185,000 jobs, as analysts had expected, US non-farm payrolls expanded by only 75,000 jobs last month.

In the UK, the precious metal ended the week 4.3% higher at US$1,336/oz but fell back below US$1,330/oz at the start of this week. In sterling, gold reached £1,054/oz last week, and is currently trading around £1,040/oz. In Australia, gold touched an all-time high of A$1,918/oz last week, and is still trading above A$1,900/oz today. The price was helped by a cut in Australia's main interest rate to a record low of 1.25% to stimulate an economy that is growing at its slowest pace in almost a decade.

Although the dollar fell sharply following the US job figures (hitting 11-week lows against the Euro), the price of copper slipped 0.5% last week to close on Friday in London at US$5,800/t. This is the eighth successive weekly decline since the red metal closed at US$6,509/t on Friday, April 12.

The London Metal Exchange cash price of copper averaged US$6,438/t in April and US$6,018/t in May, with prices depressed by higher risk to the global economy because of the trade war between the US and China, and an appreciating US dollar over most of the period.

A recent report from S&P Global Market Intelligence notes that the price ratio of copper (per tonne) to gold (per ounce) has dropped from a high of 5.1 on April 17 to only 4.4 on June 4 (which is the lowest level in two years). Writing in the Commodity Briefing Service for copper, Keval Dhokia noted that the fall in the ratio highlights the relative preference for gold as a safe haven in times of economic uncertainty, whereas copper is a commodity that is widely consumed within global manufacturing.

Investors' view of the global economy is reflected in the price of all the base metals, which were weak again last week. Nickel was down 3.0%, to close in London on Friday at US$11,625/t, with zinc and iron ore (62% Fe) both down 1.7% at US$2,484/t and US$1,764/t, respectively, with aluminium 1.5% weaker at US$1,764/t.

Mining and Market News

The implementation of new US tariffs on imports from Mexico has been averted after President Trump reached a deal with the government of Mexico over enhanced control of migrants across the border with the US.

BHP has published the results of a risk assessment of its tailings dams, and admitted that five are at "extreme risk" of damaging the local environment and harming nearby residents if they failed. In a letter to the Financial Times on June 10, the mayor of Mariana in Minas Gerais (where the Fundão dam failed in 2015 killed 15 people) has demanded more of the global extractive industry. More immediately, a US$5 billion lawsuit has been served on the Anglo-Australian company on behalf of 230,000 Brazilian individuals and organisations.

Legal action is also being taken by the European Commission against all 28 member states over their failure to create a single market for services. This highly unusual step illustrates the commission's frustration at the European Union's non-compliance with rules agreed a decade ago.

China's stock market has been hit by a record outflow of foreign capital, with US$12 billion leaving the market in April and May, according to Morgan Stanley. This is the latest sign that investors are concerned about the impact of a trade war, and on the stability of the Chinese currency.

The International Monetary Fund last week warned that rising tariffs between China and the US were "self-harming wounds" that will cut global growth by 0.3% in 2020. The report was published ahead of a meeting of international finance ministers in preparation for the G20 meeting in Japan at the end of this month.

Like Australia, India reduced its interest rates last week, with the central bank announcing a cut for the third time this year; at 5.75% this is the lowest rate since late 2010. India's GDP grew 6.8% in the year to end-March, compared with 7.2% the previous year and the slowest pace for five years.

The South African economy has suffered its worst quarter in a decade. President Cyril Ramaphosa revealed that economic output had fallen 3.2% in the first quarter, largely due to severe power shortages caused by a crisis at Escom, the ailing state power utility. This is the largest quarterly fall in activity since the financial crisis of 2008. 

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Chris Hinde

Chief Commentator, Mining Beacon

Previously editorial director of Mining Journal, and more recently head of S&P Global Market Intelligence's metals and mining team, Chris is now Mining Beacon's editor-in-chief and lead commentator. He posts two blogs every week, one on Monday reviewing market conditions over the prior week, and a second on Thursday looking at issues on the global mining scene. There is also a quarterly blog on business opportunities in the sector.

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