While gold miners are attempting to break out of a long term downtrend, copper has just been hit with a severe sell off. Spot copper collapsed from $2.69 / lb to $2.50 on January 14th, a decline of 7%. On January 1st, spot copper was trading at 2.87, that is 14% higher than today’s price.
Given the collapse in crude oil over the last months, it is no surprise that Dr. Copper is the next commodity to get hammered. Copper stands for global economic health. Both commodities are sharply lower, probably because of lower global demand. Hence, the message that the market is signaling is probably that the world is going through a significant economic slowdown.
The importance for precious metals should not be underestimated. There has been a strong correlation between silver and copper since they both peaked in 2011.
We analyzed the correlation between gold, miners and copper. The chart below shows how the three assets have moved over the last 3 years.
Of particular interest is the “spill over effect” of copper. As the copper chart shows, there have been 3 important declines: in October 2012, June 2013, and March 2014. Not coincidentally, gold and miners have followed those declines. More importantly, during the first and third abovementioned episodes it was Dr. Copper that initiated the sell off in precious metals. Hence, the “spill over effect.”
What is the insight we can derive from the chart? The ongoing decline in copper is likely to spill over to gold and precious metals miners, putting a severe brake on their breakout. That would be bad news for gold bulls. On the other hand, if the slide in copper will come to a halt, something we do not consider very likely, there is a chance that the precious metals complex will not be impacted. Likewise, if gold refuses to go lower amid crashing copper prices, it would indicate significant momentum in the precious metals complex. On a day like today, where the price of gold went 2.5% higher, there is a possibility that momentum is supporting the bullish case.
For readers who live by the numbers, we suggest to monitor the following data points. For a breakout scenario, gold needs to break trough the important price level of $1250, and stay there for at least two consecutive days. In order to respect the pattern of higher highs, gold should not structurally trade below $1200 (with “structurally” we mean that gold should not close two consecutive days below $1200).