Copper and Gold Ratio Breaking Down: A Rare and Scary Event

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BCA Research argues that the current breakdown in the CGR ratio suggests that more liquidity is needed to reflate the global financial system and keep the economic expansion on track.

The ratio of gold:crude oil prices - in dollar terms - has long been used as a tool by various specialist investors, but the copper:gold ratio (CGR) can also be very useful. At this juncture, the Bank Credit Analyst is asking just what it is that the CGR is telling investors, with the most compelling factor by far being the "rare divergence between the price of base metals and precious metals over the past few months".

The event is seen as containing both a message, and as providing an investment opportunity. The price of copper, the leading base metal, has long been seen as a barometer of economic strength, while the price of gold can be most handily described as "a bellwether for liquidity creation".

As such, the corollary is that the CGR reflects the interplay between global economic trends and policy responses. History shows that the CGR plunged when central banks fell behind the deflation curve (that is, 1992-1993 and 2001-2002), and surged when rates were normalized or policymakers were struggling to cool economic growth (1994, 1999-2000 and 2003). During the 2003-2006 period, the CGR moved potently from roughly 0.2 to over 0.6 times, as calculated by BCA Research.

BCA Research argues that the current breakdown in the CGR ratio suggests that more liquidity is needed to reflate the global financial system and keep the economic expansion on track.

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