Copper:Gold ratio a warning and opportunity

The copper:gold ratio (CGR) is frequently used as a tool by specialist investors and in recent months a marked divergence has occurred between the price of base and precious metals.

BCA Research, (BCA) the independent providers of global investment research, has described the situation as “rare” and an event that contains both a message and an investment opportunity.

Historically, the price of copper has been seen as an indicator of economic strength because of its role in the construction sector, while the price of gold is described by BCA as “a bellwether for liquidity creation”.

BCA argues that the current breakdown in the CGR is a warning that liquidity needs to be increased if global economic growth is to remain on track.

However, the credit squeeze looks set to continue, with banks still extremely cautious about the amounts of money they are prepared to lend to each other.

Interbank lending is the main channel through which central banks influence financial markets and economies and the current situation has also removed some of the impact of interest rate cuts.

Copper prices have fallen 25% in the past two months and other base metals are showing similar downward trends.

Metal market analysts estimate that a 1% reduction in global demand for copper could lead to a surplus of around 35,000 tons of copper in 2007.

Inventory levels could then trigger a further serious drop in the price of the metal.

While all metals are affected by supply and demand issues, the price of gold also reflects its role as a safe haven asset and its perceived monetary value, and in recent months investment demand has increased the price of gold to record levels and in record in time.