Gold is said to be an excellent hedge against inflation, as gold tends to rise along with inflation (expectations). InvestingHaven’s research team argued recently that is only partly true, as gold tends to be driven by sometimes by inflation and sometimes by fear, according to these 10 insights from gold’s long term chart. On the other hand, copper has performed very well recently in a ‘risk on’ environment with rising rates.
The point in this article is that copper is a much better hedge against inflation, or, to put it in a positive way, copper related investments are much more profitable in good economic times than gold related investments. Courtesy: StockCharts.
Copper a better hedge against inflation
The first chart shows the ratio of copper divided by gold (red line). After the ratio bottomed last September, it took off in November along with copper and other base metals (aluminum and steel). Industrial metals were driven higher by expectations for more infrastructure spending and a stronger global economy.
The black line shows 10-year Treasury yields. Visibly, yields are tracking the copper/gold ratio very closely. Strong industrial metals are pulling bond yields higher around the world. Higher bond yields, however, are usually bad for gold. Hence, the rising copper/gold ratio.
Higher inflation expectations based on more infrastructure spending should accompany a stronger economy. That should lead to higher interests and, most likely, a stronger dollar. It should also be better for stocks tied to base metals (like aluminum, copper, and steel) than to gold.
Copper miners outperforming gold miners in good economic times
Because of the above chart and correlation, copper miners (COPX ETF) tend to outperform gold miners when rates are rising and the economy is doing well. The ratio of copper miners (COPX) to gold miners (GDX) turned up last August.
The opposite is true as well: when rates are falling, copper miners should not be bought (read:shorted).
Courtesy of StockCharts.com