Could Gold Outperform Copper in 2023 as Housing Cools?

Viewed over the span of decades, copper and gold prices tend to move in the same direction.  Their prices were depressed during the 1980s and 1990s, and soared from 2000 through 2011.  Both copper and gold experienced falling prices from 2011 to 2015, and higher prices around 2020 and 2021. That said, both metals have had periods of strong divergence, driven by the macroeconomic factors discussed below (Figure 1).

Figure 1: In general, gold and copper prices tend to move together

Despite a general pattern of co-movement over long periods of time, the day-to-day correlation in their prices is not as strong as one might expect.  The two metals were basically uncorrelated during the 1990s and early 2000s.  Then, from 2004 to 2014, they achieved a modestly positive correlation that hovered around +0.35 but never exceeded +0.6 in any one-year rolling period.  After 2014, the copper-gold correlation of daily price changes has ranged from -0.05 to +0.40, and averaged a very modest +0.2 (Figure 2).  

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Figure 2: Gold-copper price correlation has been variable and generally not very strong

One thing that is clear, however, is that the gold-copper ratio has been highly variable over time and subject to strong trends. 

• 1990s Range Bound: one ounce of gold bought between 4,000 and 7,000 ounces of copper during the 1990s.  The ratio was choppy and range bound, typically taking about one to two years to move from the top to the bottom of the range. 
• 2001-2005: Copper Soars Relative to Gold: An economic boom in China favored industrial metals relative to gold, and the value of one unit of the yellow metal fell from about 6,000 units of copper in 2001 to around 2,500 in 2005 – around a 60% decline in the value of gold relative to copper. 
• 2005-2008: Financial Instability Favors Gold: The U.S. housing boom peaked in 2005 and 2006, which was followed by a 70% decline in U.S. home construction.  Housing markets in Europe also contracted, and Chinese growth slowed dramatically.  The resulting crisis sent copper prices plunging but gold remained supported as central banks slashed interest rates towards zero, boosting the attractiveness of gold relative to fiat currencies like the dollar.  Gold surged relative copper, with one unit of gold going from 2,500 to 10,000 units of copper.
• 2009 and 2010: Chinese Growth Favors Copper over Gold: Starting in early 2009, China rolled out a stimulus program of unprecedented size.  By 2010, with Chinese growth approaching 12% per year, the gold-copper ratio had come back to around 4,000 units of copper per unit of gold.
• 2011-2019: Gold Hits New Highs Versus Copper:  a decade of exceedingly low rates boosted gold relative to copper, while industrial and housing demand for copper cooled as China’s growth rates slowed from 11% to around 6%.  Gold went from buying around 4,000 units of copper to around 11000 units.
• The Pandemic Copper Rally:  Beset by lockdowns, consumers shifted their spending from services to manufactured goods, sending industrial metals prices soaring.  As inflation took root, investors began to price in more and more central bank rate hikes, reducing the appeal of holding gold. Gold fell back from buying 11,000 units of copper in 2019 to as few as 6,000 by the end of 2021.
• 2022 Gold Recovers:  Since early 2022 gold has again been on a march higher relative to copper, mostly because copper prices have fallen more sharply in U.S. dollar terms than gold prices.  As most of the world reopened, consumers have shifted their spending back towards services and away from manufactured items.  Meanwhile, China’s economy, under pressure from continued lockdowns and debt-related problems in its real estate sector, has continued to slow. Moreover, soaring interest rates are dampening demand for housing outside of China, notably in Europe and in the U.S.  Gold hasn’t been helped by higher rates but some investor still see it as an inflation hedge that could prosper if central banks rethink their pace of rate hikes (Figure 3).  

Figure 3: The Gold-Copper price ratio have been subject to strong trends

What drives the gold-copper ratio

Movements in the gold-copper ratio are driven by fundamentally different uses for the two metals.  Only about 5% of gold is used for any sort of industrial or other related application.  The rest of it is used as jewellery or stored in vaults.  By contrast, copper is used almost entirely for industrial purposes, with electronics accounting for 39%, and building construction for another 31%.  The rest is used in transportation equipment, consumer and general products, and industrial machinery. 

As such, gold and copper respond very differently to changes in the pace of Chinese economic growth. Faster growth in China tends to boost copper demand, sometimes with a lag of up to one year.  By contrast, gold tends to do better during and after periods of slowing growth in China (Figure 4).  

Figure 4: Faster Chinese growth tends to boost copper but not gold

The macro-economic differences between gold and copper are also apparent in terms of how they respond to interest rates.  For example, gold, which is essentially an alternative currency, responds negatively to changes in expectations of future Fed rate hikes.  Expectations for lower interest rates tend to boost gold demand while expectations for higher rates tend to have the opposite effect. 

Dr Copper, by contrast, often has a positive correlation with expected future Fed rate moves.  Higher copper prices signal strong demand for housing and manufactured goods and thus tends to correlate positively with interest rate expectations (Figure 5).

Figure 5: Gold and copper tend to have opposite correlations with changes in rate expectations

Finally, copper is in a much closer relationship with oil than gold (Figures 6 and 7).  This may be because oil and copper are both closely connected to conditions in the global industrial and manufacturing economy, whereas gold is primarily held as an investment. 

Figure 6: Copper is often tightly connected to energy prices

Figure 7: Gold has a much looser relationship with the price of crude oil than copper

Looking Ahead

• Will rising interest rates slow housing construction globally and, if so, will that put downward pressure on copper prices relative to gold?
• If the equity and bond market sell off deepens, will it force central banks to halt monetary policy tightening to the possible relative benefit of gold?  This may have already been the case in the U.K. where the Bank of England unexpectedly eased policy in October in response to a severe sell off in the U.K. gilt market in late September, boosting gold prices globally.
• Will China’s growth rebound in 2023?  Faster growth in China could boost copper prices relative to gold.  China may ease its COVID policies in 2023, potentially boosting growth but high debt levels and problems in the real estate sector will likely remain. 

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