Copper/Gold Ratio Suggests Improving Outlook

• Copper/Gold Ratio turns higher (indicating rates to rise)
• Will the new US Administration try to re-open the economy?
• Chicago orders Thanksgiving to be “cancelled”

Markets lost a small bit of ground as participants evaluated the risks of further lock-downs in the US. 

Daily new US COVID-19 infections hit a new high this week – topping 140,000 

Daily New US COVID-19 Infections – Nov 11 2020

Infections are estimated to move higher from here as the US head into winter… as families move indoors over the festive holiday season. 

Therefore, what does “200,000+” new daily infections mean for the re-opening?

Well that will largely depend on State Government (not the Federal Government). 

For example, Chicago’s Mayor just issued a new “stay-at-home” advisory effective Monday – asking families “cancel Thanksgiving”… avoid travel…. and turn away any external guests in their homes.

Nothing like government authorities telling you what you can (or can’t do) in your own home (hmmm)

If what we see from Chicago is any indication of what’s ahead for other impacted US cities – it will only hamper an already weak economy. 

Or maybe not? 

I say that because the market believes things are on the mend.

Stock prices are very close to record highs – surging on the back of an imminent (and I assume widely available) effective vaccine from Pfizer. 

So are COVID-19 risks rear-view mirror?

Or are we being overly presumptuous? 

Copper/Gold Ratio Moving Higher

I often say the bond and metal market investors are typically right…. but they are also early. 

To that end, one of the most important leading financial indicators are what we see with the copper/gold ratio and interest rates. 

Nov 12 2020 – Longtermtrends.net

As background, the ratio of copper to gold can serve as another indicator of the market’s appetite for risk appetite versus the perceived safety of treasuries. 

What’s more, it’s also seen as a leading indicator of where yields (interest rates) are headed. 

The predictive power of copper-gold stems from the distinct roles of industrial versus precious metals, the former rooted in the physical economy and the latter in finance.

Thanks to such properties as electrical and thermal conductivity, ductility and corrosion resistance, copper is used for wiring, piping, shielding, heat sinks, radiators and myriad other necessities related to manufacturing and construction as well as the generation, transmission and application of electricity.

The TL;DR is many analysts see this as a leading indicator of the global economy’s health and outlook.

As the gold line shows, this ratio has turned up in recent months and moved above interest rates. 

The 10-year treasury yield (black) is also very sensitive to economic conditions. I talked to this trend last week. For example, if the economy is improving, it implies the Federal Reserve will eventually raise short-term rates.

Now on the flip side – if we saw excessive “tightening” of monetary policy and a sharp rise on the 10-year yield – this would pose a risk to the recovery.

But as I’ve said – that is not a problem today. 

It might be in two or three years for now – but today these rates are close to historical lows (mostly due to the weakness in the economy) 

In summary, the copper/gold and 10-year treasury yield tend to track each other closely. 

And today, metal and bond investors see rates are moving higher on an improving outlook. 

Quick Check-in on the S&P 500

As mentioned in the preface, market’s gave back a little today on fears of further US economic lock-downs. 

Now I think it’s important to remember that there are plenty of things that could still go wrong over the next few months.

My hunch was markets were being a bit too optimistic on Pfizers vaccine news. 

To be clear – if this vaccine proves to be effective (we need more data) – it will be a welcomed game changer. 

However, it’s going to take a while before

(a) it’s widely disseminated (eg end of 2021 best case); and
(b) is trusted at scale

In between now and then – further State lock downs threaten a fragile (recovering) economy.

I say that because corporate debt levels remain at record levels – as these businesses were forced to borrow more money to stay solvent the past 9 months.

Now the economy needs to revive in time to save “old economy stocks” that are at risk of default.

Further shut downs will essentially seal their fate. 

As an aside, I saw today that Bill Ackman just made another billion dollar bet against the economy (just like he did in March). 

The famed investor said that “what’s fascinating is the same bet we put on eight months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine”

Ackman described the vaccine news as “bearish” because it could spur people to take the virus less seriously, and he predicted a difficult few months before the economic recovery takes off. 

Bill Ackman is no fool… and I will keep an eye on his corporate debt default bet. 

But let’s take a look at the weekly chart: 

S&P 500 – Nov 12 2020

My thesis remains unchanged…. despite the massive 10% rally last week

We briefly traded above the all-time high reached in August – failed to hold that level – and now trade back inside the range. 

This is what I was looking for…

My sense is if we failed to hold this level – prices are likely to remain range-bound (i.e. a “false break” higher)

One final note – keep an eye on the VIX. 

It remains doggedly high – well above 20 – which is an indication there is still a very healthy level of risk aversion (also supported also by the high gold price and very low bond yields). 

A controversial note before I close…

The next few months promising to be a turning point for the global economy. 

We have made some solid ground the past few months. 

Things are improving… people are getting back to work but there’s plenty to do.

But what governments decide the next 1-6 months will be critical. 

If they enforce the same draconian lock-down measures as they did earlier in the year – we will experience a severe double-dip recession (or worse). 

I don’t think the US can afford to take that risk. 

As no amount of fiscal stimulus of money printing from the Fed will help. 

Some numbers before I go.  

• There are ~7.8B people in the world;
• ~55M people die each year;
• ~1.3M people have died from COVID-19 this year – where ~80% are over 65 with pre-existing conditions
• The mortality rate for those under 65 with no pre-existing conditions is less than 1%

Despite these statistics – and knowing what we do about the virus and effective measures to look after our elderly and infirm – governments still enforce draconian measures with devastating effects (both financial and social)

In time (when we look back) – COVID-19 will be recorded as the largest self-inflicted economic disaster in history.