Copper/Gold Waving Red Flag
You can think of the ratio of copper to gold as an economic confidence index. Both copper and gold can be used as hedges against inflation since they are “hard assets”. Copper has more industrial uses than gold. Therefore, when the economic outlook is positive, copper’s performance relative to gold tends to rise. Conversely, when the economic outlook deteriorates, copper’s performance relative to gold tends to weaken.
The chart below shows the S&P 500 at the top. Copper’s performance relative to gold is shown at the bottom. Notice the S&P 500’s performance in the weeks that follow weakness in the copper/gold ratio (see red arrows). Even in the cases where the ratio worked well as a market indicator, it should be noted there can be a lag before stocks become weak, which can last as long as a few weeks.
