What the Copper/Gold Ratio Collapse Means for Financial Markets

Here is today’s Youtube video:

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14 comments

  1. (1) 1
    The Oracle says:

    Again, the copper to gold technical analysis ignores the current unusual economic environment. Specifically it ignores inflation and a hawkish FED as the primary reason rates are rising despite a slowing economy. In a normal low inflation environment, as copper and other commodities decline due to slowing economic growth, you would expect an accomodative FED lowering rates and doing QE to support the economy. Which would lead to lower interest rate yields. However that is not the current environment with 40 year high inflation. The FED is not going to immediately support a slowing economy when its focus is currently on inflation. Until inflation comes down, the FED is going to continue to raise rates and do QT, the opposite of what we would historically expect. My thinking is that the FED wants to raise rates while they can, so they have ammo to support a slowing economy later if needed, and they think the short term economy can support those higher rates. What that means in a word is stagflation. Slow growth, high inflation = interest rates higher than normal. So copper coming down reflects slowing growth is true, but the expectation that interest rates will follow soon in a high inflation environment doesn\’t make sense to me.

    1. (5) 5
      GOT says:

      Thank you for the feedback, however, we have to disagree with your interpretation of the research. In the video, we highlight the fact that those divergences can last multiple months (as they did in 2018) before the interest rates revert back to the underlying inter-market forces. This can be a result of a hawkish fed (as it was in 2018) or strong inflationary forces or both (likely currently the case).

      Copper/gold is merely an additional insight into the underlying economy and it is currently sending a clear signal; the economy is cooling down. Seeing the economy cooldown lowers inflationary expectations (which are currently rolling over) which eventually impacts the bond market (and the fed).

      Disinflation has historically been tied to exceptional market performance as the market prices in a reversal in the negative effects of monetary tightening. That said, we agree that earnings cannot contract for this to materialize into another bull run (reaching the all-time high). For now, earnings growth has decelerated substantially but is still from being in contraction territory (which is what the market is currently pricing in for the next 6-12 months). This is a topic that we’ll be diving into in the next couple of weeks to develop a higher conviction view regarding how sustainable the next rally will be.

      1. (1) 1
        The Oracle says:

        Thanks for the response. Appreciate it.

        I would just say it is not at all shocking to me to see copper coming down as worldwide growth slows. And it is not shocking to me to see interest rates elevated given high inflation.

        I disagree these two things are showing some actionable divergence that predicts anything in the market other than the current expectation we are entering a stagflation environment.

        You mentioned earnings expectations, and for me those are much more predictive of where the market is going than copper/gold vs 10 year interest rates. I personally would rather see more analysis of where you think S&P 500 earnings will go in 2022 and 2023 than ratios and divergences that I personally don’t feel incorporate the current stagflation environment. My two cents.

      2. (2) 2
        carredondo04 says:

        Once again I greatly appreciate the TA and research that GOT does. However, I agree with The Oracle above on some aspects. The Fed announced less than 2 weeks ago they would undertake “unconventional means to prevent a disruption in the debt market” after the 10 year yield rose from 3.0% to 3.5% in 3 days as a result of massive selling in the bond market. Then after the FED’s announcement the 10yr yield dropped back to 3.0% in 6 trading days. Powell pretty much said expect another 75 basis basis point next month in the federal funds rate, so why would anyone buy know knowing that bond yields will still be increasing? Who has enough money and stupidity to sell and buy up the debt market within 2 weeks to see a 0 net gain? Not retail traders. It is the FED continuing their quantitative easing to keep the markets afloat IMO. If I am right the fight against inflation is lost. You can’t raise rates and continue QE, doesn’t work. Inflation will never be beat that way and I don’t think they intend to beat inflation. I said on a post several months ago that I expect inflation to reach 12% by the end of 2022 and I still stand by that. Although not all commodities will continue to rise higher (especially precious metals) I believe prices on oil and food will continue to climb. I hope not but continue to watch daily.

      3. (1) 1
        The Oracle says:

        \”Seeing the economy cooldown lowers inflationary expectations (which are currently rolling over) which eventually impacts the bond market (and the fed).\” Agree with that, but with elevated inflation and likely a high June CPI print, what is the actionable trade or investment you are recommending at this time? You admit in the article the divergence can last months. Are you suggesting we buy the TLT now? Buy the stock market? Again, as I mentioned before I don\’t see the copper to gold divergence with the 10 year yield as actionable, especially if we have a recession. If it is, what specifically is the action you recommend? It\’s not clear to me.

        1. (5) 5
          Gordon P says:

          I agree Oracle. Recently GOT’s articles and videos have been getting less and less actionable. Peter has been making the case for an impending late-cycle blow-off top ever since the start of the year, but it has not materialised. Although he has been proven wrong, he continues to make the case for a strong rally. It will happen one day, but the big questions are, how much more losses do we have to take to get there, and how long do we need to recoup our losses?

          1. (1) 1
            David Möller says:

            I agree. Same with gold, GOT has been saying buy for a very long time now without addressing or commenting on gold moving lower and lower.

          2. (1) 1
            traderstever says:

            Agreed! Absolutely

    2. (2) 2
      Kian Soon Ong says:

      I am a new subscriber and this is my first post. So would welcome any feedback if any. I thought that the Fed controls the short term rates but the 10 year yields are actually more of a supply and demand thing and seems China and Japan have been selling epic amounts of bonds to support their respective weakening currency (Chinese yuan and Japanese yen). Hence my worry that long bond yields will still continue to spike as although Chinese Yuan seems a little more stable these few months, the Yen continues to devalue. But I can understand the logic GOT is trying to put across that at this level the risk/reward is favourable… P.S. I have TLT currently and waiting for a level to add to the position.

  2. (0) 0
    Krz247 says:

    I\’m confused on the last bit of the video. Credit spreads rise, yields fall. Credit spreads fall, yields rise. If yields rise, doesn\’t that tend to lead to a stock market fall?

  3. (1) 1
    Krz247 says:

    Good to see the debate in the comments. Healthy

  4. (1) 1
    jackgr says:

    It would be helpful if you could provide a detailed summary in text of long videos like this one, so that members like me you don’t have to watch the video through to quickly get the details.

  5. (0) 0
    ggb58 says:

    Thank you @GOT for another great video. You have provided us with many important facts, graphs and macroeconomic details in this very strange market. I have a bad feeling about this market for some reason, and believe that somehow, somewhere, somebody is in trouble with overleveraging, that we do not know about it. I think that the crypto market which has never experienced Fed tightening is in trouble and only those coins that have utility will go forward. And the many more that do not provide utility will go away. And those large leveraged exchanges that have been financed by other institutions, are in big trouble. We can talk about all these other things on earnings, about inflation, about oil, and they are all very important. But what I now suspect is even more important and can cause a severe downturn in these markets is just what I have mentioned. As Warren Buffet has stated, “when the tide goes out we will find out who has been swimming with their pants off.” I have a feeling that this crypto action as well as no follow through on the stock markets is why. This is something I cannot actually provide any detail over, but I do feel it all started with Luna and Tether. How many institutions got caught up in this we have yet to find out, and I think big money, or people in the know, have an idea and are keeping their powder dry. I keep thinking about this overleveraging and the crypto markets, which have never been part of any analysis since it is so knew, and if you just look back, cryptos started out with the Fed taking action to save the economy by lowering interest rates since 2008 or there about, as well as quantitative easing. And its possible affects on the stock market. And right now, I see danger in overleveraging companies that got caught swimming. And the bad part is, they may not have done the overleveraging, but provided the funds to do it. That’s what is bothering me, and i wonder if this is even a safe market to be in right now? I see absolutely no follow through, and again, wonder if the bigger problem is not inflation, but overleveraged institutions, or those who have provided the money to do so.

    Do you see (or anyone else) any danger in this possibility as discussed above? Do you feel that this absolute slaughter in the crypto markets may have some devastating effects in the stock markets? I am sure there is always a possibility, but if there is one thing that worries me, it is definitely this.

  6. (1) 1
    Heiko Fuchs says:

    Nice Bitcoin/Crypto update …..noooot

    lol,..so happy my service here expired,…was quite cheap but still feels like it was wasted

    cheers

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