Markets
Sinking copper-gold ratio signals elevated global economic distress
Summary
- A weakening US dollar, ongoing geopolitical uncertainties and the spate of gold buying by global central banks have enticed risk-averse investors towards gold.
MUMBAI : Investors are taking a flight to safety, leading to a rally in the safe-haven asset: gold. On Tuesday, gold price hit a new high of $2,531.75 per ounce in the international market. In 2024 so far, global gold prices have risen 22%.
The minutes of the US Federal Reserve’s July meeting were released on Wednesday, and they point to a potential interest rate cut by the US central bank in September. Gold is a non-interest-bearing asset, so lower interest rates make the yellow metal a relatively attractive investment option.
A weakening US dollar, ongoing geopolitical uncertainties and the spate of gold buying by global central banks have enticed risk-averse investors towards gold.
Also Read: Sovereign gold bonds: How a well-intentioned scheme is draining govt coffers
On the other hand, prices of copper, which is used as an input material in many industries and products, are falling. Copper has wide industrial usage, so it is often seen as an indicator of overall economic health.
On the London Metal Exchange, copper prices hit intraday high of $11,104.50 per tonne in May, but have cooled off to $9,260/tonne. In 2024, copper is up a mere 8%. In 2024, copper is up a mere 8%. There are concerns about demand from China, the world’s largest consumer of this metal.
The copper-gold ratio
Due to contrasting price movements in these commodities, the copper-gold ratio is currently at 3.69 times, showed data compiled by Yes Securities. This compares with the readings of over four times and five times seen in the recent past.
The ratio is calculated by dividing the current price of copper per tonne by the current price of gold per ounce. A higher copper-gold ratio means copper is pricier than gold. This means increased industrial demand for copper and a positive economic growth outlook. A lower copper-gold ratio is seen as a signal of economic uncertainty, which prompts increased inflows into gold, driving its prices higher.
Also Read: Buy gold for cheaper with this zaveri bazaar hack
Currently, expectations of global growth are faltering. According to the August global fund manager survey by BofA Securities, global growth expectations fell sharply compared to July, hitting an eight-month low as respondents expect a weaker global economy in the next 12 months. The survey also showed that optimism on China was the lowest since May 2022.
As things stand, copper prices are unlikely to see a quick turnaround, especially due to the economic slowdown in China. The easing of strike risks at a key copper mine, Escondida in Chile, can bring some respite on the supply, adding to the downward pressure on copper prices. The outlook for gold seems to be bright, and a key near-term cue is the US Fed chair Jerome Powell’s keynote speech at the Jackson Hole symposium on Friday.
