Gold vs. Copper…
That’s one of the key market signals to watch right now. It’s also one of the best indicators of the direction of inflation. Investors call it “Dr. Copper” for a reason. It’s regarded as a signal on the state of the global economy and inflation. Conversely, Gold is seen as a safe haven in times of economic turmoil.
“The Doctor continues to sing a song that’s quite inflationary,” says Hedgeye CEO Keith McCullough in the video from The Macro Show above.
In a recent interview with Barron’s, DoubleLine CEO Jeffrey Gundlach explained that the ratio of copper to gold prices was predictive of the future direction of bond prices. “A higher ratio suggests more manufacturing activity, and that implies an uptick in inflation and yields,” he said.
We agree. McCullough continues:
“I agree with Jeff Gundlach on the relationship between gold appreciation and copper appreciation. When there is a lot more copper appreciation than there is gold appreciation that’s an inflation signal to me.”
All of this is confirmed by macro trends. Here’s what happened in the past three months:
- U.S. Economy Accelerating: Last Friday, fourth quarter U.S. GDP (year-over-year growth) came in at 1.9%, up from 1.7% in the third quarter
- Rates Up: The 10-year Treasury yield is 2.48% versus 1.826% three months ago
- Dollar Up: The U.S. Dollar index is up 2%, in three months
- Stocks Up: The S&P 500 is up 7%
- Copper Up: Copper prices are up +20%
- Gold Down: Gold prices has fallen -6.5%
We think inflation continues to accelerate heading into the first quarter of 2017. To make matters worse, the Fed will get caught flat-footed by the coming inflation.