Copper and gold (plus silver) may tell us all we need to know

Gold silver cooper prices economy 2020
Analysts forecast the copper market will this year reach its highest surplus since 2012, while gold and silver continue to rally.

“Strictly speaking, gold and copper prices do not have any fundamental relationship with each other.”

That dictum this week comes from the commodities team at ANZ Bank — which then immediately went on to qualify.

“That being said, they produce a good indicator of how the markets and interest rates, in particular, are doing.”

While most of us have been fixated on the gold to silver ratio (of which there is more below), Daniel Hynes and Soni Kumari at ANZ have been watching the copper to gold ratio which fell to 1:3 in April, a level not seen for more than 30 years – even lower than that witnessed during the global financial crisis.

The ratio recovered to 1:3.6 in mid-July as the copper price rallied, but with the recent surge in gold, by the middle of this week it had eased back to 1:3.2.

ANZ is now forecasting that, by late this year, the copper market will be in surplus to the tune of 565,000 tonnes — the largest surplus in the copper market since 2012, and compares markedly with the 2019 deficit of 100,000t.

As the analysts say, gold tends to perform well during times of economic and geopolitical stress, but copper is the exact opposite.

Copper chart August 2020

Copper is used almost entirely for industrial production, with more than 65% going directly into construction and electronics.

That contrasts with gold, with most of that metal going into investment hoarding and only a small slice used industrially.

ANZ is now predicting copper demand will drop by 4% this year, with China able to only partially offset the collapse in the West’s industrial activity due to the COVID-19 crisis.

Gold and silver are signalling loss of faith in currencies and economies

Other analysts are a little more graphic in their pandemic outlook for the global economy.

This from Michael Every, head of Asia-Pacific financial markets research at Rabobank:

“We are deluding ourselves that we are recovering back to the status quo ante. We aren’t.”

“We are deluding ourselves [that] stimulus to shield us can be sustained forever everywhere. It can’t.”

Mr Every says that gold will win if fiat currencies lose their value (as the lira is doing in Turkey right now, combined with concerns about the US dollar).

“[If] it is gold and not any fiat currency at all … real businesses should be panicking and markets collapsing because a wrenching deflationary accounting and international-trade adjustment that will make the COVID crisis look like a normal day in the office is what looms for years during the transition away from fiat.”

Speaking of gold versus fiat currencies, Voima Gold, based in Helsinki, has done a revealing calculation on the US dollar versus gold.

In 1932 gold was worth US$20.67 per ounce. In Thursday trading in New York, the gold price went through US$2,067/oz.

Gold chart August 2020

In 88 years, therefore, the US dollar has declined by 99% against gold.

That is a startling figure and illustrates the fact that gold can preserve your wealth, while paper money does not.

Meanwhile, Christopher Ecclestone at London-based Hallgarten & Co, as usual, pulls no punches, writing this week that “while the markets dance in a Gatsby-like frenzy, they seem to fail to notice that the economy is looking more like 1931 by the day”.

“The rise in base metals prices is welcome but we cannot help feeling that the industrial metals are ‘whistling past the graveyard’ of the real economy which, no matter where you look (and we include China) is looking mighty sickly,” he said.

Big gold accumulations in private hands

Voima also made a point about gold stocks that is usually overlooked. While most discussions revolve around official holdings, Voima has calculated the following gold stocks in private hands by region:

India with 24,500t, China (20,398t), Germany (8,918t), (Italy 5,707t), France (4,605t) and Switzerland (920t).

While Switzerland lags in total, it comes in on the top of gold held per capita.

In figures out this week from the World Gold Council (WGC), we learn that gold-backed exchange-traded funds (ETF) in July recorded an eighth consecutive month of inflows, with July alone adding 166t of bullion worth about US$9.7 billion.

Global ETF holdings have once again reached a new all-time record high — now hitting 3,785t.

Moreover, the rising price is proving no discouragement from ETF investing, with the WGC reporting that the trend of rising inflows continued in the first trading days of August when gold went through US$2,000/oz.

North American funds in July accounted for 75% of all inflows.

The WGC noted, however, that — as ANZ did with copper — that Mr Market in July was sending out conflicting messages.

They cite:

  1. The S&P 500 reaching a monthly closing high;
  2. The US 10-year yield finished at an all-time low of 0.53%;
  3. The “highly concentrated” NASDAQ reached record levels and was up 20% so far this year;
  4. Silver had its strongest month ever, rallying by 34%;
  5. Gold rallied by 11% and, at the end of July, was up nearly 30% on the year.

Silver continues “remarkable” price performance

There are equally impressive statistics out of the Washington-based Silver Institute this week.

Dubbing it a “remarkable price performance”, the institute notes that from an intra-day low on March 18 of US$11.64/oz, the silver price (as of Thursday’s US$28/oz) has rallied more than 140% and is at a level not seen since 2013.

Silver chart August 2020

“The silver price hike has been fuelled by its inherent safe-haven status, fears of inflation, remarkably low interest rates and continual liquidity boosts by central banks,” the institute said.

They see both retail and institutional demand for the metal.

July was silver’s highest monthly gain since 1979.

Global silver-backed ETFs posted all-time high inflows in 2020, up from 296Moz on 1 January to 1.25 billion ounces as of Thursday.

Silver bullion coin demand is up 60% so far this year.

And the gold-to-silver ratio which peaked at 1:127 on 18 March now stands at 1:72 — a decrease of 43%.

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