Tuesday, May 14, 2013

Copper/Gold Ratio at Inflection Point

I keep track of the copper/gold ratio as it relates to the market.

Source: Stockcharts.com

In many ways, the copper/gold ratio is just another version of a risk-on/risk-off metric. Copper is very sensitive to economic forces, rising in price as global economies expand and demand for copper increases (risk-on). And we know that gold represents a safe-haven asset (risk-off). Therefore whenever the copper/gold ratio is rising, it's generally bullish for the stock market and vice versa, when falling it's generally bearish for the market.

In the weekly chart above, I use the Vortex Indicator (VI) to identify when the copper/gold ratio is in an uptrend or downtrend. It's not perfect (no indicator is, which is why you need to use many), but in isolation the trend of this ratio does a fairly good job at being on the right side of the market.

The current reading is interesting, with the VI seemingly at an inflection point. I typically wait for a more definitive signal to develop from the VI, one where the green and red lines are more clearly deviating from each other. Right now the lines are too close together to conclude much of anything concerning market direction -- stay tuned.

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