Using Dr. Copper to Check the Pulse of the Global Economy
Holy cow! This economy is on fire; witness the second quarter U.S. GDP growth rate of 4.1%. Is it sustainable or a just a temporary spurt? It’s often said that the Copper price has a PHD in economics, because of its widespread use in many diverse industries. That use ranges from homes, factories, and electronics, to power generation and transmission and much more. As a result, swings in demand and therefore price, give it a leg up when it comes to economic forecasting. In general, rising demand is reflected in higher prices and a growing economy, and shrinking demand lower prices and weaker economic growth. Based on a fairly consistent track record over the last several decades, the current copper price trend is pointing to an impending global economic slowdown. Perhaps that 4.1% GDP growth rate for the quarter will not be sustained after all. Whether the approaching global growth slowdown morphs into an actual recession is unclear right now; it’s a bit too early for a call on that. But let’s review the current behavior of Dr. Copper to give us some historical clues that may help guide appropriate portfolio risk management decisions.
Chart 1 sets the scene, by comparing the Pring Global Commodity Index with a long-term smoothed momentum indicator of the copper price. For the record, the Index is calculated by combining euro, yen and dollar based industrial commodity prices (CRB Spot Raw Industrials) and weighting them by GDP. The vertical lines flag peaks in the copper momentum. With the notable exception of the 1995 and 2005 reversals, all such signals were followed by some form of decline in the commodity index. Some, such as 1966 resulted in an immediate turn, others, like the one triggered in 2006 for example, experienced a lag. The overall message from this relationship is pretty clear. A weakening in copper momentum is a reliable leading indication that commodity prices in general are about to drop. Where commodities go, the global economy usually follows.
Chart 1 Global Commodity Prices versus Copper Price Momentum
Sources: Reuters, Pring Research
When copper price momentum peaks that usually means industrial commodities in general will take a hit. (click chart to enlarge)