Gold vs. Copper

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"The gold/copper ratio is near all-time highs."

This isn't to pick on China or the aluminum industry. Price distortions are going to be a challenge in several sectors. Chile announced plans to subsidize small copper miners with the country's $20 billion stabilization fund. This will have a similar effect as China's power subsidies. Propping up higher-cost producers who should go out of business based on market pricing. We're also getting price distortions in the form of tariffs and duties. A reverse kind of subsidy.

There are also some interesting "natural" distortions going on in the market. Especially with gold and copper prices. Copper has fallen from $4 to $1.80 per pound over the last nine months. Gold has held nearly even. The gold/copper ratio is near all-time highs.

That has some important implications because gold and copper are produced together from porphyry deposits. Some of the largest copper mines on the planet have lots of associated gold. The gold helps pay operating costs.

This is worth paying attention to because it changes the cost structure for the copper industry. Porphyries with high gold content may be profitable even at low copper prices. This makes porphyries very competitive against pure copper deposits. It also dampens price signals in the copper market. Deposits that aren't profitable producing copper at $1.80 may get enough of a boost from sales of gold by-product that they can stay in operation. This keeps excess copper supply going to market, depressing copper prices further than they might go in a lower gold price environment.

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