The Copper-to-Gold Ratio and the Dollar Effect
Institutional asset managers use copper-to-gold ratios as one indicator. Leading Indicators for 10-Year Treasury YieldsIn fact, as bond yields and ratio spreads widened in the third quarter of 2022, DoubleLine Capital CEO and Chief Investment Officer Jeffrey Gundlach cites the relationship:10-Year U.S. Treasuries Fair Value Yields Below 2%As the divergence persisted earlier this year, the copper-to-gold ratio, in Gundlach’s words,They are shouting that 10 year olds should be lowered more.”
Copper-to-Gold Ratio and 10-Year Treasury Yield
But given the focus of asset managers on the relationship between this ratio and Treasury yields, we need to understand the market catalysts that affect this relationship, especially the US dollar.
Both copper and gold are dollar-denominated commodities and exhibit negative correlations with currencies. Daily data from 2020 to 2023 show a correlation coefficient of -0.10 between copper futures and the dollar index. The correlation between gold and the dollar index showed a coefficient of -0.31 over the same period.
These metrics are intuitive. A rise in the dollar against local currencies should boost commodity prices for non-dollar buyers. surely, A strong dollar has a tightening effect On global economic activity, according to an analysis by the Bank for International Settlements (BIS). The following diagram confirms this relationship.
Copper Futures vs. Dollar Index
gold vs dollar index
Since the dollar is a shared input for both copper and gold valuations, the gold-to-copper ratio significantly neutralizes this effect, as indicated by the -0.01 correlation with the dollar index. While this makes copper more sensitive to economic growth, it also increases tracking error compared to dollar-influenced commodities such as US Treasuries.
Treasury yields and dollar valuations: subtle dynamics
The correlation coefficient between the 10-year Treasury yield and the dollar index reached 0.82 over the 2020-2023 analysis period. Despite this positive correlation, the relationship between the dollar and Treasury yields is even more nuanced.
A weaker dollar tends to correlate with lower US Treasury yields during the easing cycle initiated by the dovish US Federal Reserve. Conversely, his hawkish Fed should strengthen the dollar and push up short- and long-term interest rates.
But in a Goldilocks economy without policy change, a negative shock should encourage a flight to both the dollar and Treasuries. This is what happened during the 2014 and his 2015 commodity crashes and he again in 2019.repo crisisThe copper-to-gold ratio and other dollar-sensitive indicators should deviate from interest rates given their positive correlation with the dollar.
10-Year Treasury Yield vs. Dollar Index
Copper-to-gold ratios are susceptible to macro-paradigm shifts
Additionally, changes in global dollar demand due to geopolitical factors could create headwinds for both the dollar and U.S. Treasuries. of “war and peace,Credit Suisse analyst Zoltan Pozser said of the geopolitical trend: May discourage reserve managers’ appetite for dollar-denominated bondsIn such a scenario, a weaker dollar and weaker bonds could co-exist, exacerbating the divergence between copper-gold ratios and 10-year yields.Foreign holdings of US Treasuries have already declined in recent years, Pozar suspects This trend may continue.
Foreign holdings of US Treasuries
As the dollar and U.S. Treasuries increasingly react to the global macro catalyst, the copper-to-gold ratio and other less dollar-sensitive indicators may overlook emerging factors. And that could compromise its usefulness as an indicator.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect those of CFA Institute or the author’s employer.
Image credit: ©Getty Images / bodnarchuk
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