Doctor Copper's Diagnosis

Market lore has it that copper is able to predict turning points in the global economy, and certainly its price relationship with gold is instructive in evaluating the mood of investors.

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Market lore has it that copper has a doctorate in economics, with an ability to predict turning points in the global economy. This popular adage stems from the metal's use in widespread applications, from power generation and electricity distribution to use in smart phones.

Generally, rising copper prices suggest strong demand for the metal and a growing global economy, while declining copper prices may indicate sluggish consumption and an economic slowdown. For example, the weakness in the copper price in early 2014 came before the global economic deceleration, and the slump at the start of 2015 coincided with stalled economic growth in many countries.

The past few months have again been difficult for the red metal. The London Metal Exchange cash price for copper dropped from an average of US$6,438/t in April to US$6,018/t in May, and the metal is currently trading around US$5,860/t. Dr Copper is worried, no doubt, by the trade disagreements between the US and China, and by uncertain economic signals in many major economies, not least those in Europe.

In complete contrast to copper, the price of gold benefits from political and economic chaos, with the precious metal being seen as a store of wealth in troubled times. The price of gold also benefits from factors that reduce the implied cost of holding the metal (which pays no dividend), including lower interest rates, which have a tendency to rise when economies grew.

Despite considerable market chaos, the price of gold was relatively lacklustre over the first five months of 2019 (averaging only US$1,296/oz) but finally broke higher in the first week of June, jumping from US$1,280/oz to US$1,340/oz. The metal is still trading at over US$1,330/oz.

As mentioned in this week's HindeSight, the ratio between the price of copper (in tonnes) and gold (in ounces) is illustrative of market conditions, or at least of investor sentiment. This ratio has fallen 14% over the past two months, from 5.1 on April 17 (and 5.6 a year ago) to around 4.4 at the moment, which is the lowest level for two years.

There are positive signs, however, for copper (and perhaps the global economy). In its recent Commodity Briefing Service report on copper, S&P Global Market Intelligence (SPGMI) illustrated some signals that the copper price decline will reverse. For example, the net position of LME copper traders has reversed through May from a short position of 326,793 tonnes on May 5 to a long position of 101,275 tonnes on May 31. SPGMI comments that the "large shift highlights the volatile sentiment that has resulted from the rapidly evolving geopolitical relations between and US and China, particularly among speculative participants on the LME". SPGMI argues that "the shift to a large net-long position illustrates that copper prices could rise rapidly if financialised sentiment continues to improve".

Indeed, high-frequency statistics suggest that the key Chinese sectors for the global copper market remain robust. For example, China's Caixin Purchasing Manager's Index remained in expansionary territory to register 50.2 in May, while electricity generation increased 3.8% year over year in April. The floor space of buildings under construction in China has increased by 8.8% this year through April, according to China's National Bureau of Statistics. SPGMI notes that the Chinese construction sector continues to consume more refined copper following the 9.5% year-over-year increase in real estate investment in 2018.

Copper and gold are the single most important base and precious metals. Analysts for both sectors have been signaling higher prices for these commodities but, if history is any judge, they are unlikely to be both correct. 

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.