The Last Two Equity Corrections Started With A Plunge In The Copper To Gold RatioMarch 10, 2014
There hasn’t been a genuine oversold condition in the S&P 500 since October 2011. Coincidentally, there has not been a correction in ratio of copper to gold prices since 2011. Since 1998, when the correlation between interest rates and stocks flipped positive, revealing the dominant fear among investors as deflation not inflation, the ratio of copper to gold prices has served as a decent tripwire for a deflationary shock.
The correction in stocks that began in August 2011 was preceded by a drop in the ratio of copper to gold. Similarly, the correction in 2010, that began in May, was preceded by a plunge in the copper to gold ratio. Recently, with backdrop of military activity in Ukraine, falling exports from China and a widening of the current account in Japan, the copper to gold ratio is plunging.
The 2010 and 2011 plunges were precipitated by temporary lulls in the Federal Reserve’s large scale asset purchases. In the chart below, we have modeled out the glide-path for the taper, and it is pretty clear to see that metals investors are reacting to the Fed’s taper template.