Can Copper and Gold Rally in Tandem?
Source: Reuters, Clyde Russell (7/19/11)
"Buying gold is a bet the economy is stuffed; buying copper is a bet for China's soft landing. Can both views be right?"
It seems incongruous that gold and copper can be both rallying at the same time.
Gold reached a new record high just below $1,600 an ounce on Monday as investors sought a safe haven from the European debt crisis and worries the U.S. government may default amid the failure of squabbling politicians to agree on how to cut the deficit.
Copper is up about 14% since its low this year of $8,504.50 a ton reached in May and is getting within shouting distance of its record high of $10,190, reached in February.
Basically, buying gold is a bet that the world economy is pretty much stuffed and the debt/deficit problems in Europe and the United States won't be solved any time soon.
Buying copper is a bet that China's economy will achieve a soft landing and continue to expand, driving demand for base metals.
Can both views be right?
On the surface, the answer has to be no. At some point either Europe and the U.S. will sort of out their problems, lifting the cloud over the economies, or they won't and the world will tip back into a recession that even China will feel.
If Europe and the United States can resolve their problems to the market's satisfaction, a key leg of the bullish gold story is removed.
Taking away safe haven demand doesn't necessarily mean gold will lose its luster, but it does mean any price gains will be more dependent on demand from central banks and for jewelry fabrication.
In this scenario it's hard to see gold making strong gains above its current level, although valuing the precious metal has always been a little tricky.