Commodities - Signaling Reflation or Stabilization?
BY CHRIS PUPLAVA
Dr. Copper Speaks
In addition to equity prices implying strength for crude oil ahead, there are other relationships that are pointing to stabilization in other commodities such as base metals, which would imply signs that all of the fiscal and monetary efforts across the globe may be having their desired effect. While it is too soon to tell as a month or two of data does not make a trend, the data at least tells us to pay attention.
For example, a great economic leading indicator in terms of gauging reflation and economic growth is the yield curve and the ratio of gold to copper. When reflation efforts first begin one of the strongest commodities to react is gold, while copper lags as base metals typically peak just prior to or during recessions, which was the case last year as copper peaked earlier in the year. The reflationary efforts of central banks and governments experience a lag as the desired effects take months to be felt, and so signs of copper stabilizing signals that reflationary efforts are beginning to take hold. This can be seen below which shows that the gold to copper ratio and the yield curve both turn down as the economy begins to stabilize. Both were at historical extremes a few months ago and have come down from their respective peaks. The last time we saw the gold to copper ratio decline was in the middle of 2003 when the U.S. economy was beginning to come out of its malaise with employment figures expanding as well as industrial production, and China’s economic juggernaut getting ready to take off as well. While the two relationships can retest their highs, any further decline should grab everyone’s attention as they are likely discounting economic stabilization in the coming quarters.
Similar to the gold to copper ratio, the gold to oil ratio is also hinting at possible economic stabilization on the global scene. The gold to oil ratio has declined off its recent high like it did late in 2001 as the U.S. was coming out of a recession. One more indicator to highlight is the gold to silver ratio, with silver outperforming gold during economic expansions as it has greater industrial usage than gold. After the recovery of the Asian Currency Crisis late last decade and the U.S. recession earlier this decade, silver began to outperform gold and the gold to silver ratio collapsed, highlighting an economic recovery has taken hold. The same may be taking place for silver stocks as they are starting to outperform gold stocks, though the ratio is still near the extreme and may take more time to reverse.
As mentioned above, with global exports collapsing recently, the relationships highlighted may only be signaling that economic growth is getting “less bad” rather than signaling an outright recovery, but the improvement to “less bad” is a hallmark for bear market conclusions as the markets discount the future. Thus, the relationships highlighted above may not necessarily be signaling economic growth ahead, but rather the conclusion to the bear market in commodities. A clear break of the CRB index below support at 180-200 would invalidate the above analysis and prove that recent developments were only working off oversold extremes before resuming their declines. However, if the CRB can hold support then we may have indeed witnessed the end to the commodity bear market that began last year.
