Copper, Gold and The End of Growth

The early 1980s mark the historic low for the copper/gold ratio. It has fallen steadily over time thanks to the deflationary impact of technology. On the flip side, gold is money and the stock is large relative to the flow. The long-term trend is down.

The massive spike in the 2000s is nothing against the spike from the 1940s to 1960s as the developed world and the electronics industry emerged from the ashes of World War II.

If copper and gold have another week like they just had, the ratio will fall to the 2008 low. There is deflation and recession fear, but a panic low is not in sight.

The optimistic scenario is the 2016 copper/gold low. There will be a bit more selling, a bit more yuan depreciation, maybe another 20 percent correction in U.S. stocks to test or even break the 2018 low. Copper/gold hits the 2008 low, but rebounds as China fears abate. The ratio rebounds and we find out this is the first half of a 20-year bottoming process.

The pessimistic scenario is the 2008 low doesn't hold and the early 1980s low looms. That move requires going beyond 700. That's huge for global markets and could entail major dislocations such as a major China crisis, but then comes the much larger question.

Is this a massive 40-year basing pattern for the gold/copper ratio? Gold soared relative to copper during the 1970s. A measured move off this basing pattern would carry gold to more than 1200 times the price of copper. That could mean $2 copper would trade alongside $2,400 gold or $10 alongside $12,000. The more probable move, in my opinion, is the former. A doubling of gold and stagnant or even falling commodity prices as growth evaporates.

Or looking at copper alone, a move to $1.40 seems possible. In a major deflation scenario and a 725 ratio, gold trades at $1000. At a 1200 ratio, gold trades around $1,700.

Copper is trading right at the .618 fib from the 2008 low to the 2011 high. A break and the next stop is trendline support just above $2.25. Break that and $1.40 opens up.