Copper-Gold Battle Signals Economic Slowdown

Copper-Gold Battle Signals Economic Slowdown

Hopes of reaching a consensus on increasing the federal borrowing limit in the US until next week are strengthening the US dollar and pushing down the price of gold. Signals from Federal Reserve members about the possibility of a rate hike in June are also putting pressure on the price of gold. Nevertheless, gold still demonstrates a stronger outlook compared to copper, which is considered a barometer of the economy. This is interpreted as a signal of an economic slowdown.

What is the Gundlach ratio and what does it mean?

The Gundlach ratio, which shows the amount of gold that can be bought with copper, is at its lowest level since the beginning of 2021. Currently, the price of copper per pound is $3.60, while gold is priced at $1,960, resulting in a Gundlach ratio of 0.0018.

The Gundlach ratio is a measure created by renowned fund manager Jeffrey Gundlach to closely monitor the relationship between copper and gold. A low ratio is seen as an indicator of an approaching recession. The ratio is calculated by dividing the price of copper by the price of gold. Currently, copper is trading at around $7,900 per ton and $3.60 per pound, while gold is priced at $1,960 per ounce, resulting in a Gundlach ratio of 0.0018.

Copper prices have declined by approximately 7% in the past month and around 16% on an annual basis, with the current price being $3.60 per pound. Meanwhile, gold has experienced a slight decrease of 1.45% in the past month but has risen by over 5% on an annual basis, reaching the level of $1,960. The copper-to-gold ratio, which is considered an indicator of industrial activity against concerns of economic stagnation or inflation, has also shown a downward trend in recent months. It has reached its lowest level since the beginning of 2021, with a ratio of 4.03 for one ton of copper and 0.0018 for one pound of copper.

This situation may indicate a period of increased economic uncertainty and cautious behavior among investors. Additionally, a low Gundlach ratio is often associated with expectations of a decrease in interest rates. Therefore, investors take this ratio into account when shaping their investment decisions, as they believe it may provide a clue about the long-term economic outlook.

For instance, a low ratio may indicate an approaching recession. However, experts still advise investors to consider other economic indicators and not solely rely on the Gundlach ratio when making investment decisions.

Between August 2020 and October 2021, the copper-to-gold ratio almost doubled due to the rapid acceleration of global economic recovery after COVID-19. However, copper prices have been weak for a while due to recession concerns caused by high-interest rates, leading to a decline in the copper-to-gold ratio.

Credit Suisse warned: Gold price dropping below $1,900 cannot be ignored The price of gold tried to hold its ground at the support level of $1,960 yesterday. According to experts, further downward movements below this level could result in a sharper decline. If gold falls below $1,954, analysts point to $1,947 as the first support level. Breaking this level could target $1,929. Credit Suisse, however, issued a warning about the possibility of a much sharper decline. The bank’s analysts stated that prices could struggle to find strong support below $1,949 and that a correction down to $1,892 should not be ignored. However, the financial institution emphasized the need to keep in mind that these predictions do not always come true, as prices are influenced by many factors.