Wild Times for the Copper/Gold Ratio

The once very stable relationship between the copper/gold ratio and T-Note yields is starting to wobble into an increasingly unstable situation.

For many years, there has been a really reliable relationship between bond yields and the ratio of copper prices to gold prices. It has been so stable, in fact, that we can plot the relationship on a chart using a single y-axis, employing a simple adjustment of multiplying the copper/gold ratio by 1000. The two plots have been very close to each other for most of the past several years.

That has changed in a big way, starting around the time when Jerome Powell was elevated to Federal Reserve Chairman in February 2018. The two plots that used to sit very close to each other have started to wander farther apart, only to lurch back toward the other after going too far.

Spot copper prices have been crashing from a high of $4.87 per pound on March 8, 2022 down to $3.22 on July 14. Gold has been trying to keep up with copper’s plunge, but it has been pretty tough to do that. The result is that the copper/gold ratio has been falling rapidly, as copper is dropping faster than gold.

That should mean a drop for long-term interest rates, if the relationship was working normally. But instead, bond traders are focused on the CPI growing at 9.1% per year and PPI growing at 11.3%, and are thinking that perhaps the privilege of earning 2.96% for loaning money to Uncle Sam for 10 years is not such a good deal. 

This is creating the type of big spread that has led to big reversals for bond yields in the past. But how can bond yields turn lower if inflation is still so high? That is the conventional thinking question. But the message from the copper/gold ratio is that something else is cooking that the conventional thinkers are not yet contemplating. And what’s cooking typically leads to lower interest rates.