Copper’s warning, gold’s scolding

walker_obs-rvs_webIt is often said that the price behavior of copper can be an early tell on what the market’s next move will be. The reasoning is relatively simply (perhaps too much so). Because copper is used in nearly all aspects of economic activity, ranging from homes and electronics to factories, it is most sensitive to global-growth expectations and turning points in business cycles. As prices rise, demand for copper increases, which in turn means that activity likely is increasing before it shows up in fundamental data. Think of copper more broadly as an indicator of industrial activity.

“One thorn of experience is worth a whole wilderness of warning.” ~ James Russell Lowell

Gold, on the other hand, is not used nearly as much as copper, nor is it as reflective of demand that occurs in booming times. It stands to reason then that if copper is outperforming gold, investors are betting on an acceleration of industrial activity, whereas weakness in copper relative to gold means the opposite.

Now clearly the end of the commodity super cycle in China has held copper prices down alongside most commodities, but it is worth considering the message of copper relative to gold as an indicator of where we are in the cycle.

Take a look below at the price ratio of copper relative to Gold. As a reminder, a rising price ratio means the numerator/copper is outperforming (up more/down less) the denominator/gold. A falling ratio means the opposite, as gold leads copper.

MW-CS210_embedd_20140822103520_NSIn recent writings, I’ve been noting that we may be entering a period where a defensive posture finally starts to pay off, with the possibility that our equity-sector ATAC Beta Rotation Fund remains exposed all in on the utilities, consumer-staples and health-care sectors for a more prolonged period of time given inter-market weakness. Copper appears to be warning Nouveaux Bulls that the time may be ripe for defensiveness overall, while gold may be signaling a coming fear spike is coming as noted in a prior writing of mine.

Dr. Copper has a PhD for a reason, right?

Written by Michael A. Gayed for Market Watch, August 22, 2014.

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