by Ryan Detrick, LPL Research
We ran our first blog on the copper/gold ratio relative to the 10-year Treasury yield in May. One month later, it appears that the copper/gold ratio moved higher in advance of the spike in yields that occurred on June 27. This is more than likely spurious, but nonetheless, the move in copper/gold since June has been a fairly decent predictor of the direction of the 10-year Treasury.
As can be seen in the chart above, the 10-year Treasury yield (blue) followed the directional moves of the copper/gold ratio (yellow) fairly closely during June and July. For example, since June 14, when the Federal Reserve raised rates, investors were flocking to risk-on assets such as copper, driving the ratio higher; 10-year yields increased (prices declined) shortly thereafter. A move higher in the ratio may signal that economic growth is increasing and copper is gaining appeal.
Since 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. After all, the durable metal can be used to produce products such as wires, pipes, and fittings that have wide applications throughout the economy.
Generally, when the economy is expanding copper prices rise, which often leads to higher inflation, and thus lowers demand for safe-haven assets such as gold and Treasuries.
As an important note, year to date, the copper/gold ratio has been an accurate forecaster of 10-year Treasury rates; however, this is just one chart, and relying solely on one indicator is not prudent. Nonetheless, during this time period, when the ratio rose, prices for both 10-year Treasury notes and gold subsequently declined. With that in mind, this may be worth watching, and we will continue to look for data trends that could provide additional insights regarding the health of the economy and markets.
IMPORTANT DISCLOSURES
Past performance is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
The economic forecasts set forth in the presentation may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.
This research material has been prepared by LPL Financial LLC.
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