COPPER AND GOLD HAVE BEEN TRENDING IN OPPOSITE DIRECTIONS FOR A YEAR -- BUT THEIR DIRECTION MAY BE CHANGING -- THE COPPER/GOLD RATIO IS BOUNCING OFF LONG-TERM SUPPORT -- RISING BOND YIELDS ALSO FAVOR COPPER OVER GOLD -- THAT'S A SIGN OF GROWING CONFIDENCE

COPPER AND GOLD HAVE BEEN TRENDING IN OPPOSITE DIRECTIONS... A lot of recent intermarket rotations in global markets have started to show more optimism; along with a willingness to favor economically-sensitive and riskier assets at the expense of safe haven defensive ones. That has included the buying of stocks and the selling of bonds; as well as the buying of cyclical stocks and the selling of bond proxies.  Rising global bond yields over the last two months also show more optimism on the global economy which has been reflected in stronger foreign stock markets.  Here's another recent rotation in play between a couple of commodity markets that may also be sending a more optimistic message. That's the relationship between copper and gold.

CHANGING TRENDS... The weekly bars in Chart 1 compare the prices of copper (red bars) and gold.  The main takeaway from the chart is they've been trending in opposite directions since the middle of last year.  Copper peaked in June 2018 and gold turned up three months later (see arrows).  Copper turned down again this April (second red arrow) followed shortly by an upturn in gold (second gold arrow).   To the right of the chart, we can see gold weakening over the last two months; while copper is starting to rise.

NEGATIVE CORRELATION... The bottom line in Chart 1 plots a 20-week Correlation Coefficient between the two metals.   Correlation measures the degree of linkage between them.  And it shows their correlation peaking last autumn and falling into negative territory (below zero) for most of this year.  That simply confirms the fact that they've been trending in opposite directions for more than a year.   That raises a couple of questions. Why is that happening? And what would it mean if copper starts doing better than gold?

USING RATIO ANALYSIS BETWEEN THE TWO METALS...The best way to study the relationship between two markets is by using ratio analysis.  And that's what we're doing here.   The red monthly bars in Chart 2 plot a relative strength ratio of copper divided by gold over the last two decades.  A number of things jump out on the chart.  First, the rising ratio shows copper doing much better than gold during the bull market years between 2003 and 2006 (after underperforming during the bear market years between 2000 and 2002).   Second, the plunging ratio during 2007 and 2008 took place during the financial crisis when safe haven money favored gold over the more economically-sensitive copper (as stock prices plunged).  The copper/gold ratio has moved mostly sideways since the 2009 bottom.   That's where we're going to turn our attention.

THE LAST DECADE... The ratio has moved up and down over the last decade as the two metals took turns leading.  Copper led during 2009, 2012 and 2013, 2016 and 2017.   Gold led during 2011, 2014 and 2015, and since the middle of 2018.   One hint to where we're going is that gold usually leads copper during periods of economic slowing as investors favor safe havens.  Copper usually does better when confidence is higher.  In case you're wondering how we measure that confidence, take a look at the green line.

TEN-YEAR TREASURY YIELD...The green line overlaid over the red ratio in Chart 2 shows the direction of the 10-Year Treasury yield.You'll notice that they tend to rise and fall together.  Bond yields drop when investors are worried about the economy; and buy safe haven bonds and gold.  Bond yields rise when investors are more confident; and sell bonds and gold in favor of riskier assets like copper and stocks which do better in a stronger economy.

BOND YIELD AND COPPER/GOLD RATIO ARE IN MAJOR SUPPORT... Chart 2 also shows the copper/gold ratio and bond yields having fallen together for more than a year.  And both are now in an area of potential long-term support along ten-year lows.  The red ratio is testing previous lows formed during 2009 and 2016 (red circles); while the 10-Year Treasury yield is testing previous lows formed during 2012 and 2016.   Both rose together after each of those previous troughs.  And may be starting to do so again.

BOND YIELD AND COPPER ARE RISING TOGETHER...Chart 3 shows trend changes that have taken place in the three markets over the last two months.   And they've done so together.   The green histogram bars show the 10-year Treasury yield bottoming at the start of September (and again in October) and reaching the highest level in three months yesterday.  That suggests that bond yields have bottomed.  The price of copper bottomed with the TNX during September and October and also reached a three-month high yesterday.  Gold peaked at the start of September when bond yields bottomed.   And has been falling since then.

SIGNS OF CONFIDENCE... The fact that the three markets are moving in sync with each other makes economic sense.  Since gold is a non-interest paying asset, it has benefited from falling bond yields over the past year; it has also risen with bond prices as investors worried about weakness in the global economy and moved into safe havens.  Copper is closely tied to the global economy and suffered from those same concerns.   Weakness in China, the world's biggest importer of copper, also hurt the industrial metal.  But rising Chinese stocks (and currency) suggest improvement there.  The recent upturn in global bond yields (and stocks) also suggests that investors are becoming more confident in the global economy.   And are buying riskier assets like industrial metals and stocks; and rotating out of safe havens like Treasury bonds and gold.   That's an environment that favors copper over gold.