Copper/Gold No Longer on Hold

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

One of the most important risk ratios and easily the biggest snooze fest from the past year is finally starting to move. 

That’s right – after going nowhere for more than a year, the Copper/Gold ratio is making a directional move! And believe it or not, it’s resolving in the opposite direction of interest rates.

Instead of following rates higher, Copper/Gold is rolling over to the downside and raising questions regarding risk appetite and overall market health.

And from the looks of today’s price action, Dr. Copper is breaking down on an absolute basis as well.

We can’t emphasize the importance of these developments enough. We’ve been awaiting resolutions of these ranges since early last year, and it’s finally happening.

Let’s talk about it.

Here’s an overlay chart of the Copper/Gold ratio and Copper futures:

Notice how closely the Copper/Gold ratio trades with Copper futures on an absolute basis. Both have been a mess, chopping sideways since last spring.

That’s changed this week as Copper/Gold appears to have made a decisive downside resolution from its range. We can now add the ratio to our growing list of completed topping patterns. 

Copper followed that action today by printing a fresh 52-week low on absolute terms. 

Heading into today’s close, Copper is down more than 6% on the week and threatening to violate a critical support level at its lows from the back-half of last year. Bulls definitely don’t want to see this one join our list of completed tops.

$4 is the line in the sand for Dr. Copper. If that breaks, look out below.

These breakdowns (or “potential” breakdown, in the case of Copper on absolute terms) do not bode well for the overall market.

Dwindling demand for copper speaks to shrinking economic growth and a general risk-off tone – as if the market tone could be any more risk-off.

While we don’t want to get ahead of ourselves over a few days of price action, we also don’t want to understate the importance of these downside resolutions.

For now, it looks like the path of least resistance is lower for one of the most important procyclical assets in the world. That’s something we haven’t been able to say for the past two years.

COT Heatmap Highlights

• Lean Hogs: Commercials carry their smallest net short position in three years.
• Gold: Commercial hedgers reduced their net short position within 2% of a three-year record.
• Palladium: Commercial's net long position hit a  three-year extreme this week.
• US Dollar Index: Commercial hedgers hold their largest short position in three years.

Click here to download the All Star Charts COT Heatmap.

Thanks for reading!

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And be sure to download this week’s Commodity Report below!