Can Copper/Gold Help Forecast the 10-year?
by Ryan Detrick, LPL Research
We are often asked in which direction the 10-year Treasury yield is headed. If we, or anyone else for that matter, could answer that question accurately, we’d be sunning on a yacht surrounded by breathtaking islands. But given that we don’t have a crystal ball on hand, we instead look to various data points and charts. One such chart, a fairly common one for fixed-income traders, is the 10-year Treasury bond versus the cooper-to-gold ratio.
As can be seen above, the 10-year Treasury bond followed the directional moves of the copper/gold ratio fairly closely during the time period in the chart. For example, in mid-December 2016, as investors were flocking to risk-on assets such as stocks and copper, the ratio spiked and 10-year yields increased (prices declined) shortly thereafter. This rally seemed to be driven by speculation that the Trump administrations expected increase in infrastructure spending would drive up future demand for copper. After all, the durable metal can be used to produce products such as wires, pipes, and fittings that have wide applications throughout the economy. Because copper is highly sought after when new infrastructure projects develop, it is considered to be a decent indicator of global and U.S. economic health. Generally, when copper prices rise, the economy is expanding: which often leads to higher inflation, and thus lowers demand for safe-haven assets such as gold and bonds.
Recently, amid signs that the administration’s policies may take longer to materialize, the copper/gold ratio has declined. A move lower in the ratio may signal that economic growth is decreasing and copper is losing its appeal. Lower copper prices suggest lower inflation, which helps bonds and gold move up in price. To date, the copper/gold ratio has been a fairly accurate predictor of 10-year Treasury rates, but this is just one chart and relying solely on this will probably not lead to a yacht. That said, if the pattern holds and the ratio rises, the 10-year and gold may decline in price.