This report analyzes the historical fluctuations of the gold-copper ratio and its relationship with the US business cycle. The current upward phase of the gold-copper ratio has lasted for over 3 years and may be facing a turning point. The decrease in gold demand in China and India has impacted market dynamics. The report suggests that the gold-copper ratio may reverse in the coming months, due to changes in economic conditions and market structure
Yield vs. US Stocks
Based on historical data, the 10-year US Treasury yield needs to fluctuate by two standard deviations for the US stock market to react. This means that the yield needs to change by approximately 60 basis points within a month. In the past four weeks, the yield has fluctuated by about 50 basis points.
Gold Demand
The physical gold premium in China has turned into a discount, leading to subdued import volumes in recent months. Additionally, jewelry imports in China are also contracting. India's gold imports have decreased from 125 tons in August to 52 tons in September.
Gold-Copper Ratio Observation
Since 2006, the gold/copper ratio has shown a cyclical fluctuation of about four years (from trough to trough). The upward phase typically lasts around 2.5 years, while the downward phase usually lasts between 1.5 to 2 years.
Currently, this upward phase has lasted for over 3 years — this either indicates an upcoming new downward phase or a possible change in market structure.
Gold-Copper Ratio Observation II
Historical data shows that the gold-copper ratio is highly correlated with the US business cycle (as shown in the chart, consistent with the trend inverted with PMI). This is because economic improvements typically drive copper outperformance over gold (due to increased industrial demand), while economic deterioration usually leads to gold outperforming copper (due to rising safe-haven demand).
The prolonged low levels of PMI and other ISM indicators may be one reason for the extended duration of the current "upward phase" of the gold-copper ratio.
Gold-Copper Ratio Observation III
I believe the gold-copper ratio may experience a reversal in the coming months. Reasons include three main aspects: ...
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