As gold has lost some of its shine lately, some industrial metals look attractive on many levels.
The price of gold has been in a somewhat concerning downtrend, falling a bit more than 9% from its recent high hit in August. To be sure, some technical indicators suggest it isn’t time to worry just yet.
Copper, on the other hand, is a different story. Copper is part of the highly cyclical industrial metals group—the prices of which perform better with a strengthening economy and worse with a weakening one. The price of the Copper Continuous Contract (HG00) is up 26% since September 23, around the time a global trade into economically-sensitive and riskier assets began.
Copper looks like a solid bet, at least for the near term. As long as Covid-19 vaccines continue finding people’s arms and economic stimulus remains sufficient, economies can reopen. That should unleash pent-up demand, spurring manufacturers to buy more copper for production. Meanwhile, copper-mining companies haven’t ramped up capital expenditures or investments in capacity to supply more—yet another factor supporting the metal’s price. Total capex combined from the world’s eight largest copper miners has been flat for the past year, running at around $15 billion per quarter, according to data from Pavilion Global Markets. In short, supply has barely budged.
Unsurprisingly, the copper-to-gold ratio—the price of a unit of copper relative to that of gold—has risen from its March 2020 low of just above 0.1 to just over 0.2. The ratio’s long-term average is almost 0.3, so Pavilion strategists expect “some more catch-up for the bronze metal this year.” While gold certainly could still rise, copper appears to be emerging as a solid bet against gold.
This, however, is a short-term thesis, based on the trajectory of the economic cycle. If Covid-19 and stimulus developments keep unfolding positively, copper can do well.
There is, however, also a longer-term argument against gold’s relative appeal. Copper aside, money has been flowing into cryptocurrencies, creating another headwind for gold. The share price of the Grayscale Bitcoin Trust (GBTC), a Bitcoin exchange-traded fund that Pavilion tracks, is up thousands of percentage points since its 2015 inception. “There are so many ‘generational’ investment themes playing out before our eyes, including demand for Bitcoin as a new asset class, that gold is moving out of favor,” the Pavilion strategists wrote.
Write to Jacob Sonenshine at [email protected]
