Copper/Gold Ratio As Predictor For S&P 500

On Wall Street copper is give the title of “Dr. Copper” because of its ability to predict future economic activity. When the price of copper falls relative to its prior annual price, we usually head into a recession. But we can’t look at copper priced in dollars – they are useless after all, aren’t they? – instead let’s look at copper in terms of ‘real money’. Gold.

It turns out that copper priced relative to gold is actually very correlated to the equity markets. And not only correlated, it tends to predict a few months ahead of time where the stock market is headed.

Take a look at the chart which David Rosenberg shared in his recent market commentary. It originally comes from FT’s short view column (and video). You can click the chart to get a larger version:

Source: Gluskin Sheff

I don’t think that is a result of data mining. Copper is used in almost every single part of global industry and gold is a barometer of monetary and systematic risk. So put the two together and you have a single indicator that reflects economic activity. According to Gluskin Sheff the copper/gold ratio has a 95% correlation with the S&P 500.

Needless to say, the hard right edge of the chart doesn’t look all that healthy right now.