KEY THEMES
In the time of the global pandemic, there is no shortage of issues to keep investors more anxious and vigilant about the future, yet some distress has more causes than others. The disruptions triggered by a major surge in cases of the new Delta variant cloud the sanguine view about global recovery.
One indicator that historically used to reflect how markets view economic prospects at a given period of time is Jeffrey Gundlach’s famous relationship between copper and gold prices and the U.S. 10-year Treasury yield. Copper is a cyclical commodity, thus its demand is closely correlated with economic activity. Meanwhile, gold is considered a popular safe-haven asset, especially during uncertain times. As yields reflect inflation expectations, the correlation between the copper-gold ratio and the U.S. 10-year Treasury yield was significantly positive. However, this correlation has been weakened by COVID-19-driven disruptions and implications, first in late 2020 and more recently in mid-2021.
With divergence seen recently, the relation between the ratio and the yield has been challenged by:
(1) The uneven economic recoveries.
(2) Greener economic policies.
(3) Global supply disruption.
(4) Excessive monetary support by central banks
(5) The market’s perception of inflation drivers.
Despite the gloomy outlook driven by the Delta variant, copper prices jumped to their highest level in more than four weeks as the supply bottleneck in China fueled imports demand. Meanwhile, gold prices rose above USD1,800, after the Fed’s recent hint about tampering its monthly bond purchasing this year.
The conclusion is that the co-movement of the trio no longer means causality; complex changes in the structure of the global economy post-COVID-19 started to weaken the correlation to some extent.